Advantages and disadvantages of a limited company

We look at the benefits of operating through a limited company, as well as the difficulties that come with it

Being a limited company contractor is a step many contractors decide to take, whether they are entering the world of self-employment for the first time or have been doing this for quite some time as a sole trader. Being a contractor through a limited company comes with its advantages, however, it does present some drawbacks at the same time.

Advantages

Although there are several ways of contracting as a self-employed individual such as going through an umbrella company, contracting via a limited company is more tax efficient overall. Whilst Umbrella companies will usually deduct PAYE and NICs from your payments (along with their weekly/monthly fee), your income will solely come in the form of a salary. Contractors operating through limited companies usually tend to take out a small salary for themselves and can choose to withdraw the remainder of their income in the form of dividends, as well as deciding what level of salary and dividends they wish to take out. Contracting this way is ultimately financially more viable, as dividends are subject to a lower rate of tax and do not attract NICs, which would usually have to be paid by those such as sole traders. To see how dividends are taxed, there's more information on the Government website.

Trading through a limited company also means you are able to claim back on a wider range of expenses. If any expenses are solely classed as business costs such as accountancy fees, equipment, software or travel, these can all be claimed back when filing your accounts. Limited companies are also entitled to join the Flat Rate VAT Scheme, an incentive provided by the Government which essentially allows a limited company to reclaim VAT on purchases that you have been charged for by HMRC; the level of VAT flat rates vary based on the type of business.

Having a limited company can also add a certain “professional” image to your enterprise, especially if you have other business interests that you may wish to pursue in the future. It also helps to add more credibility, giving clients a sense of confidence in working with a business rather than an individual operating as a sole trader.

Disadvantages

Whilst there are several benefits of being a limited company, there are a few drawbacks that come with this. Running a business means that there are more administration costs compared to operating through an umbrella company (who would usually handle the administrative side), and as a director, you are responsible for all company affairs, both financially and administratively. Usually, however, your accountant would take most of these burdens away, leaving you to run your limited company effectively and efficiently.

Whilst being a director means you are responsible for all company affairs, this also includes accounts being prepared accurately and submitted on time. Filing your accounts and tax returns is a crucial point in the year, and although your accountant will usually take care of these matters, it is still the company’s responsibility to ensure that these are submitted on time. Having effective communication with your accountant removes these barriers, especially around crucial times in the year to ensure your accounts are filed properly.

Contracting through a limited company, whilst being a proven method for most contractors, is not always the most appropriate step. If you are thinking about contracting only for a short amount of time (a few months or half a year) before considering going back into full-time employment, setting up a limited company would perhaps not be the most viable option, and could perhaps prove to be more costly than beneficial. If, however, contracting is your future venture which you may want to pursue and continue to follow, then a limited company may be one of your best options yet.