Whether you are tired of working through an umbrella company or feel your business is ready to make the move from tiny sole trader to limited company contractor, contracting through your own limited company is one of the most rewarding ways of working.
Of course there are some downsides, so here is an overview of the advantages and disadvantages of a limited company:
- Higher take home – The main reason most contractors take the leap into contracting. Contractors trading through an Umbrella Company are entitled to around 60% – 65% of their take home pay, the reason being that working through an umbrella company means you receive your payment in the form of a salary; this is subject to full PAYE Tax and NI, no different to that of a permanent employee! A Limited Company however is one of the most tax efficient ways of working, meaning you can take home between 75% – 80% of your contract.
- Entitled to the Flat Rate VAT Scheme - Why would being part of a VAT scheme be an advantage? Well the Flat Rate VAT Scheme is an incentive introduced by the government, it helps simplify taxes and means you can charge VAT on invoices but pay back at a lower rate, keeping more of your hard earned money. Any good contractor accountants can tell you more about the Flat Rate VAT Scheme should you have any more questions.
- Claim money back on a wider range of expenses - Anything purchased for the use of your business means you can then claim back on expenses. For example if you were an IT Contractor and needed a piece of software for your business, you could buy this and then claim that cost back on expenses.
- Complete working flexibility - In theory, as a contractor you are your own boss, which means you can choose where and when you would like to work.
- Personal assets are covered - As a sole trader you and your personal assets are at risk should your business fail. As a contractor trading through your own limited company, your business is treated separately from yourself, therefore your personal assets are not at risk and your company is treated separately from yourself should there be problems.
- Some paperwork involved – Now, no-one likes to do paperwork, and working through your own limited company does come with some administration however, any good accountant will be able to support you with the paperwork required.
- Accounts filed – You have to file your accounts at Companies House each year.
- Not good if you are….Expecting to contract for three months or less, or expect to be earning more than £25,000 a year.