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When is the right time to go limited?

Limited company contracting has many benefits but it’s not the right choice for everyone.

Whether you’re new to contracting and want to weigh up your options, or you have been Umbrella contracting and are thinking of switching to limited, we’re here to help you make the choice that’s right for you. Chris James, Head of Accountancy at JSA and Chair of the Freelancer and Contractor Services Association (FCSA) highlights important issues you should consider.

 

Are you able to work as a limited company contractor?

 

The first thing to do is to ascertain whether limited company contracting is an option available to you – this will depend upon your IR35 status and the other organisations in your supply chain. IR35 is the legislation which all contractors need to be familiar with. It was created around 20 years ago to ensure that freelance workers pay the correct amount of tax.

You can read our guidance on IR35 here, though as a general rule, if your role is subject to a significant level of control, it is more likely to be considered ‘inside IR35’. In addition, if you are unable to substitute yourself for another suitably experienced operative, or if you and the end client treat each other in much the same way as the end client would treat their own employees, you’re also likely to be ‘caught’ by the rules. If this is the case, a limited company isn’t likely to be beneficial for you, from a purely tax-based perspective.

Generally speaking, the more you earn the more likely you are to have autonomy over how, when and where you do your work. If in your role you are your ‘own boss’ in terms of organising your day, there’s more of a chance that it would be deemed ‘outside IR35’ in which case using a limited company would be a sensible option available to you.

You have probably already realised that IR35 is highly complex, so it is best to take the advice of specialist contractor accountants such as JSA before making any decisions.

 

What do you expect to earn?

 

The amount you charge your clients will have an impact on your decision to become a limited company contractor.

Even if your role is not subject to IR35 but you are earning less than £150 a day, you may find that limited company contracting offers little benefit – the accountancy cost and effort involved in administering your limited company may not outweigh the tax advantage at this fee level.

Conversely, fees of £150+ per day would usually provide sufficient tax advantage to make setting up and running a limited company worth your while.

Again, you should take advice from specialist contractor accountants like JSA before making a decision. If your fee is near £150 per day now, but you expect it to rise in the near future and continue to increase, this may affect your decision.

 

Advantages of limited company contracting

  • Tax efficiency

This is one of the main reasons many people opt to be a limited company contractor. You can usually work in a more tax efficient way as you can claim tax relief on allowable business expenses and pay yourself a mixture of salary and dividends.

  • More work opportunities

As your contracting career becomes more established you may look to work with bigger companies. It’s common for larger organisations and multi-nationals in particular to have a policy to work only with limited companies. Having a registered limited company makes it straight-forward for your end clients, giving them a perception of greater security. Though switching to a limited company may make no difference whatsoever to your role, you may find it makes a difference to the way you are perceived. Limited company contractors are often thought to have a greater depth and breadth of experience.

  • Limited liability

By operating as a limited company, your personal assets will normally be protected if someone takes action against you as a result of the work you have carried out. In contrast, a sole trader can become personally liable for any defects in the work they deliver.

 

Disadvantages of limited company contracting

  • Administrative burden

When operating a limited company you’ll need to submit annual accounts to HMRC and an annual report to Companies House. You’ll need to keep on top of your finances throughout the year and, most likely, use experienced accountants like JSA to ensure all the paperwork is completed correctly and on time.

  • Responsibility

There are legal duties which you will have to understand and adhere to as a Company Director. These need not be onerous or off-putting, but you may decide that you do not wish to take on these additional responsibilities, in which case Umbrella contracting might be a better solution for you.

 

What to do next?

If you’re considering limited company contracting, please get in touch with our specialist team who can advise you on your IR35 status. This will enable you to understand if limited company contracting is an option you can consider, or if Umbrella employment might better suit your personal circumstances.

Our team can talk you through the working options available to you and answer any additional questions you may have so that you can make the choice that’s right for you, based on your unique and specific circumstances. Our aim is to make working as a contractor as straight-forward as possible, enabling you to enjoy the freedom that comes with flexible working.

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Chris James

About the author

Chris James FCA is an IPSE accredited, award-winning chartered accountant. He is Head of Accounting Operations at JSA Group, which provides accounting, payroll, umbrella and business advisory services to small businesses, contractors and freelancers across the UK. He is also chairman of the FCSA, the premier compliance accreditation body in the recruitment supply chain sector.