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The Ultimate Guide To Limited Companies

Written By Contractors, For Contractors

One of the most common issues you’ll face as a contractor is how you intend to provide your services to your clients. Should you register a limited company, work via an umbrella, or become a sole trader. Deciding how to run your contractor business is complex, and many contractors may not fully understand the processes involved. Once you have made a decision, what then?

Our guide covers everything you need to know about limited companies, from deciding whether a limited company is the right business arrangement for you to the day-to-day administration. We cover it all, although HMRC’s complex rules and legislation mean that contractors can’t know the law inside out. Please only use this resource as a guide – seek professional advice if you are unsure about anything.

Table of Contents

What is a Limited Company?

A limited company is a type of business with a distinct legal identity, separate from those who own it (the shareholders) and those appointed to manage it (the directors). It is a business structure that limits the liability the company’s owners are exposed to. It is for this reason that limited companies are so popular with contractors. Unless there is fraud or serious wrongdoing, the amount you risk losing is restricted to the capital initially invested (the nominal value of shares held)…

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Limited Company vs Sole Trader

A sole trader is a self-employed individual who is the sole owner of their business. There are no shareholders to pay dividends to or directors to help manage the day-to-day operations. As a sole trader, there is no distinction between yourself and the business; you are considered the same entity. You have absolute control over how the business is run and are entitled to keep 100% of the profits.

There are seven key differences between a limited company and a sole trader…

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Advantages and Disadvantages of a Limited Company

A limited company is a tax-efficient business structure. The business’s expenses (including wages) can be offset against corporation tax, while the owners can minimise their tax burden by paying themselves a specific combination of salary and dividends. Owners of limited companies can also defer tax obligations by leaving surplus profit (known as ‘retained earnings’) in the business bank account and withdrawing it in a later tax year…

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Limited Company Directors Responsibilities

All UK limited companies must have at least one director. The initial director, or directors, are appointed during the company formation process; however, these company offices can be changed at any time by notifying Companies House. Directors are bound by a strict code of practice, entrusted with running the business, and subject to certain statutory obligations. As the limited company is a separate legal entity, you must act in the business’s best interests, making decisions on behalf of the company and not yourself…

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Limited Company Accountants

Despite the strengths an accountant may bring to your business, there is no legal requirement to employ their services. Just as there is no legal requirement to have an accountant, no legal restriction stops anyone from performing their work. If you are confident in your ability to deal with your finances, you can meet all your statutory reporting responsibilities yourself.

That said, there are risks involved in performing accounting tasks for which you have no specific training. It is easy to go wrong or to miss a deadline, mistakes that can result in significant penalties and fines if not caught promptly…

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Limited Company Taxes

As the director of a limited company, you are responsible for ensuring all personal and business taxes are paid on time. If they’re not, you could be liable for penalties and fines…

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Business Bank Accounts

According to the Companies Act 2006, it is a legal requirement for a limited company to have a bank account. The bank account must be registered to the limited company; it can’t be registered under the name of its directors or shareholders. If you’re a contractor that has recently incorporated a limited company with Companies House, you must open a business bank account before you start trading and making/receiving payments…

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Limited Company Insurance

The necessary limited company insurance policies vary depending on your industry. However, few individual insurance policies are legally required. Employer’s liability insurance is the only mandatory business insurance, and even then, it only applies to those companies with employees. If you are operating as a sole director/employee (as most contractors do), then the policy is unnecessary…

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Limited Company Expenses

As a limited company owner, claiming allowable business expenses reduces your ‘profit-before-tax’. This, in turn, reduces the amount of corporation tax owed to HMRC. More allowable expenses mean less taxable profit and a lower tax liability. You can either pay your limited company expenses directly from your business account or pay them personally and have the company reimburse you.

Any employees you have are also allowed to claim expenses, so it’s essential to establish clear guidelines regarding how much they’re allowed to spend and when. You must file all expense claims regularly, and your employees must record all expenses with receipts…

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Buying a Car or Van

When a limited company purchases a car or van, the business can deduct some of the costs from taxable profits. How much depends on how the vehicle is used, how the purchase is financed and how environmentally friendly the vehicle is…

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Capital Allowances

If understanding what you can and can’t expense wasn’t tricky enough, as a limited company director, you must also be aware of capital allowances. But what exactly are limited company capital allowances, and how do they work?

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Benefits in Kind

As a director and employee of your limited company, you pay tax on company benefits like cars, bikes, and childcare. The amount you pay depends on the benefit you get; some can be tax-free, while others incur tax and National Insurance. A benefit in kind is any non-cash benefit of monetary value provided by a company to an employee that isn’t ‘wholly and exclusively’ for the purposes of the business. They are often called ‘perks’, ‘fringe benefits’ or ‘notional pay’…

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Limited Company Pensions

As a contractor, contributing to your pension is the best way to both reduce the taxes you owe and secure your future. But what are your options? And what is the most tax-efficient way to pay into it if you work via a limited company?

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Employing a Spouse

It is common for contractors to add a spouse as a second shareholder or employ them to help with the company’s day-to-day running. While the process may be relatively straightforward, whether it is the right decision is another matter entirely. It is not the right decision for every married couple, and several vital issues must be considered…

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Dormant Limited Company

There may come a time when you want to put your limited company in an ‘inactive’ state; this is known as making a company dormant. A company can be considered dormant if it has had no significant accounting transactions during the period. A significant accounting transaction is one that the company should enter in its accounting records. They do not include filing fees, penalties for late filing, or money paid for shares when the company was incorporated.

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Closing Your Limited Company

Before you begin the process of closing your limited company, you should ask yourself whether you will potentially need it again. If you are only looking to make your company inactive for a short time, you may be better off leaving your limited company dormant…

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Withdrawing Money From Your Limited Company

Assuming you have no other sources of income, a tax-efficient way to take money from your limited company is via a combination of salary and dividend payments. This method works by paying yourself a specific salary and then paying out the rest of your post-tax profits via dividend payments.

Identifying the correct salary can be difficult; you must consider the National Insurance thresholds for employers and employees. If you take a salary higher than the employer and employee National Insurance thresholds, you will effectively pay National Insurance twice on the same income. You’ll pay once as an employer and once as an employee – not a tax-efficient way to operate.

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Business Asset Disposal Relief

Business Asset Disposal Relief (‘BADR’), formerly Entrepreneur’s Relief, is a capital gains tax relief available to eligible individuals when they dispose of (close, sell etc) their business. It reduces the capital gains tax rate on disposals of certain business assets from 20% to 10%…

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Inside IR35 Calculator

Our inside IR35 calculator looks at the financial implications of being caught by the IR35 tax legislation, having to work through an umbrella company.

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Our outside IR35 calculator looks at the financial implications of working via a limited company.

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