Best Option

Find the right accountancy solution for your requirements

If you’re considering moving over to contracting via a limited company, there are a number of reasons why it could be a great move for you and your business. Now, we’re not saying that there are no downsides (our article here covers that in detail), but it’s worth going over the advantages of becoming a private limited company:

There are lots of things to think about, and most important of all is your own personal preference. You might want the simplicity of not being a limited company, or you might prefer the security of having ‘limited liability’.

One of the key reasons for going limited is the possibility of significantly reducing your tax bill
Any accountant will tell you that one of the key advantages of a limited liability company is the ability to operate in a tax efficient way. One of the main ways is via tax planning, which essentially means you get to plan when you withdraw your earnings and how you invest for your companies future growth. You’ll also make savings around National Insurance. As a sole trader you pay National Insurance on all of the profit you make for your business, but as a limited company you allocate yourself a set salary and only pay National Insurance on this. The remainder of your profit remains within the business. You can then withdraw any of the money at any time (this is known as dividends) and not pay any National Insurance on top, this way avoiding to pay a higher rate of tax.

Better tax planning opportunities
Let’s say you make £60,000 in the 2017/2018 tax year. If you are a sole trader you’ll pay tax on the whole amount, less tax allowances. However, if you are limited you get to choose how much you withdraw each year and only pay tax on what you withdraw. So if you only took £40,000 you could leave the other £20,000 in the bank account, which might be handy if in 2018/2019 you had a bit of a slower year and only earned £20,000 in new profits. It would also mean you come under the tax threshold.

It could increase your chances of winning contracts
Some customers, usually PLCs or larger limited companies, will only work with other limited companies—so you might miss out on work if you aren’t set up as a limited company.

It’s now much more cost effective to set up as a limited company
Many of the costs associated with managing and operating a limited company are no longer much greater than with a non-limited business. In general, at least from the perspective of taxation and accountancy, changes to legislation over the last few years have meant much lower costs associated with limited companies.

It minimises risk of your personal assets
The main benefit of trading via a limited company has always been your ‘limited liability’. As a sole trader or other non-limited businesses, your personal assets can be at risk if the business fails for any reason and leaves debts, but this is not the case for a limited company. As long as the business is operated legally and within the terms of the Companies Act, the personal assets of the company’s directors and shareholders are not at risk.

The phrase ‘limited company’ inspires confidence
Operating as a limited company often gives suppliers and customers a sense of confidence in your business. By being limited it gives the appearance of being substantial and established.

It’s a great way to protect your business name
There is no legal requirement for a limited company to start trading within any set time period after it is set up. This means that forming a limited company is a simple and low cost way to protect your business name. Once your proposed company name is registered as a limited company, it is protected by law and no one else is allowed to use it.

However good the advantages might seem, there are always of course some potential disadvantages, which might mean that going limited is not the best option for you. So better to be aware of them up front. Visit our Disadvantage of Going Limited page.

Furthermore, for more information on what to consider before setting up on your own, take a look at our Starting a Business guides.

 

Need help finding the right accountancy solution for your requirements?

Answer the questions below for our recommendation.

1
2
3
Do you: (select the first that applies)
Please select an option