We cut through the accounting speak to explain in simple terms what a limited company is and why you might want to set one up if you’re a self-employed contractor or freelancer in the UK.


What is a limited company?

A private limited company (also known as a personal service company or PSC) is a corporation, which means it is seen as an individual in the eyes of the law. A corporation pays its own tax, can own possessions, borrow money, sign contracts and even be sued as if it were a person.

In the UK, there are two types of limited company: limited by shares and limited by guarantee. The primary difference is that a company limited by guarantee is a non-profit, so all profit after tax is invested back into the company.

As a sole trader, you can upgrade your business to a company limited by shares and become its director and sole shareholder or even bring on partners. This is called setting up a limited company. There are a number of advantages to doing this, including increasing your take-home pay, but there are also a few factors to be wary of.

Benefits of a limited company

1. Less tax, more take-home pay

As a sole trader in the UK, you pay personal tax on all of your income. This works well when you’re first starting out, but as your business grows, you will reach a point where your total earnings will push you into a higher tax band than if you were paying corporation tax (currently 19%) and giving yourself a small salary and dividends from your company.

However… be aware of the Intermediaries Legislation (IR35)

The last few decades have seen a steady upswing in the number of people in the UK who are choosing to work for themselves and taking advantage of the tax benefits of owning a limited company. HMRC grew concerned that this slew of limited companies was a sign of tax avoidance – that full-time employees were essentially calling themselves contractors for the tax benefits. So, it rolled out IR35.

There are many factors that determine whether you fall “inside” or “outside” of IR35. For instance, one of the ways you could be determined to fall inside IR35 is if you do regular work for the same client. HMRC has a tool to check your employment status for tax purposes, but  whether you fall into IR35 or not is determined by your client and they can face penalties if HMRC disagrees with their assessment, so many tend to err on the side of caution.

If you fall inside of IR35, you need to pay tax as if you’re a full-time employee of the company. In these cases, we recommend working through an umbrella company or being added to your client’s payroll rather than registering a limited company.

See also: Everything you need to know about working through an umbrella company

Flat Rate VAT Scheme

When working out VAT, you’re usually required to fill in a tax form every quarter. Certain limited companies, which fall outside of IR35, have the option of paying a flat rate of 16.5%. You can use this HMRC tool to calculate whether your business would qualify and whether you’d benefit.

2. Limited liability

As your company is a separate legal entity, your liability is limited to the amount you originally invested in the company. In simple terms, that means that if your business runs into financial trouble or goes insolvent down the line, the repo man can’t come knocking for your personal assets to cover that debt. 

3. A better pension

Individuals do receive tax relief when they contribute to pensions, but this relief is capped. You only receive the relief on up to 100% of your salary.

If your company makes an employer contribution, it won’t face this cap. You can contribute up to your annual allowance (usually £40,000). What’s more, these contributions are seen as tax-deductible business expenses.

See also: Are you a UK contractor? Maximise your tax-efficiency by using your pension

4. Claiming expenses

On the subject of business expenses, there is a much larger variety that you can claim as a limited company compared to a sole trader, including some healthcare and childcare. A particularly attractive one if you live outside of the city might be mileage for work trips taken in your personal vehicle.

Our accounting team can help you claim business expenses

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See also: What business expenses can I claim through my limited company?

5. Protected business name

Registering a company with Companies House means that your business name is on an official register and no one else can trade under that name in the UK. Note: this isn’t the same as a trade mark (which enables you to take legal action against anyone who uses your name and can be registered separately), but it does provide some protection from competitors and counterfeiters trying to steal your business name and customers.

6. A professional appearance and credibility

Being able to put “Ltd” after your company name can give clients a great first impression, especially if you do a lot of work for corporates or industries where clients prefer to work with established entities.

In addition, as your business will be its own separate entity, you can open a business bank account and use the business name when you apply for financing.

7. Financing options

On that note, there are more financing options available to companies and often favourable interest rates. In addition to borrowing money, having your own corporation means you can issue shares to new investors. In other words, you can sell part of your business when times are tough or if you want to fund a new growth strategy.

8. Pass your business on to future generations… or sell it

You invest years of your life in building up a business and there comes a time when you either want to retire (and take home a nice sum from it) or pass it on to another generation. If you’re a sole trader, you are the business and it cannot exist without you at the helm.

Setting up a limited company gives you the freedom to step away and can also ensure that the business you’ve built outlives you.

How to set up a limited company in the UK

When you’re a business owner, you have a lot to worry about and the admin that goes into setting up a corporation can feel overwhelming. What many don’t realise is just how quick, easy and affordable limited company set up can be.

We can set up your limited company in just one business day

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Limited company set up rules

Your limited company name must be:

  • Unique
  • Have “Ltd.” or “Limited” at the end
  • Free of offensive or abusive words
  • Free of trademarked words
  • Free of sensitive words, unless you have official permission to use them

Your UK limited company address must be:

  • A physical address
  • In the UK

Limited company legal requirements

Starting a limited company also involves fulfilling a few legal requirements.

  • Filing Articles of Association and a Memorandum of Association
  • Appointing directors and perhaps a company secretary who will make sure your statutory requirements are completed
  • Providing the physical address of your registered office. This doesn’t have to be where your company conducts business, but needs to be somewhere where you can be served legal documents.

Limited company administrative requirements

If your personal tax is currently above the corporate tax rate and you’ve determined that your business falls outside of IR35, so you’re able to take advantage of all of the tax benefits, one thing that might still be holding you back from setting up the limited company is the administration involved.

The directors of a limited company must file annual accounts and annual tax returns every year and the director must inform Companies House of any changes to the company (for example if the registered office changes or a director resigns).

Your annual accounts must meet the International Financial Reporting Standards and UK Generally Accepted Accounting Practices standards.

You’ll also need to make sure you pay corporation tax (or inform HMRC if you don’t owe any) by a particular date, which will depend on your business’s financial year.

This can seem like a lot on top of your current workload, which is why you might consider hiring an accountant. With the right team behind you, running a limited company can be even easier, and work out cheaper in the long run, than going it alone.

Our contractor accountants offer specialist, personalised accounting and tax services with a flexible fee structure to help businesses of any size. Get in touch with us at accounting@sableinternational.com or +44 (0) 20 7759 7553.

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