Contracting through a limited company
Contractors choose to contract through a limited company because it offers more control over how they pay tax and how they pay themselves.
The IR35 legislation has complicated matters enormously for the contracting community. These days most contracting roles are classified whether they fall inside or outside that legislation.
Some roles, if offered directly by a small business, are not classified and the contractor decides whether they will work as an employee of the business or deliver services as an independent contractor.
The biggest impact of the inside or outside IR35 determination is on your tax.
Being inside IR35 means you’re deemed to be working as an employee and either the end client, the agency or a third party (such as an umbrella company) are responsible for deducting the correct amount of tax from your pay.
Outside IR35 allows you to manage your own financial affairs and decide what you pay yourself and how.
Setting up your own company for contracting
Some may have you believe that setting up an LTD company for contracting requires special assistance with that, you must pay fees for that service.
That is not the case at all, especially if you plan to be the only director/owner of your own company. You have a number of ways to set up your own company as a contractor:
- Do it yourself: You’ll need to gather certain information and documents before starting the process online with the company house. From the beginning to the end the process takes about 20 minutes and, if you’ve followed the steps correctly, you should have a confirmation in about an hour or so.
- Use your accountant: Many accountancy firms for contractors offer setting up a limited company as part of their service. As a contractor with an LTD, you’re likely to need an accountant to help you register for corporation tax, set up payroll, VAT returns, and advise you on the best approach to structure your finances.
- Pay a specialist: There are many websites offering to set your limited company for a fee and include other services as part of the package - such as a registered address, VAT and corporation tax registration, setting up a bank account and more.
An LTD company set up cost - how much is it?
Setting up your own company for contracting can be remarkably inexpensive and possibly free if you’re smart about it. The cost of setting up a limited company will depend on the option mentioned above:
- DIY: If you set your own company online via the Company House, you won’t pay anything.
- Accountant: most accountancy specialising in contractors offer this service as part of their regular fee.
- Specialist: given that you will need an accountant, this is not the best option and generally a waste of your time and money.
The cost of running a limited company
Running a limited company does cost a certain amount of money, mostly in accountancy fees plus some small administrative charges payable manually.
It is therefore important that you pick the right accountancy firm and factor this expense into your future plans before embarking on the journey of becoming a contractor.
Does setting up an LTD company for contracting make sense?
Precisely because there is a cost to having a limited company, it only makes sense to set it up if you’re committed to the life of a contractor.
If you’re usually employed but happen to have an opportunity to take on a contract outside IR35, it is worthwhile considering the LTD option.
You should think about the length of the contract, daily fees, the likelihood of you staying in contracting once this contract expires.
Remember, depending on the work you do and your contractual requirements you may also need limited company liability insurance.