Freelancing through a limited company
The vast majority of contractors and freelancers work through their own limited company. A limited company is a distinct legal entity in its own right. You are not the same as the company; the law sees the limited company as a separate entity. It has rights and responsibilities and can own property or equipment. The company may have a business account with a supplier, have its own bank accounts and can hold shares in other companies.
Implications of operating through a limited company
There are more rules and regulations to running a limited company than an unincorporated business. A number of returns need to be made within a strict time limit:
- Company tax return
- Company accounts and a computation of taxable profits
- Form P35 in relation to salaries including directors remuneration
- Form P11D (return of taxable beneﬁts and expenses) for each director/employee
- Personal tax return for the company directors.
For detailed information on limited company legislation read the Companies Act 2006.
- Your company is a separate legal entity, which makes it liable only for debts it incurs. Your personal assets, such as your home, are protected
- It can boost credibility amongst clients and suppliers and financiers
- If you acquire work via agencies, they don't have to deduct tax at source. Instead they can pay you gross, which is more tax efficient
- Business expenses and losses can be offset against tax
- You can control how you combine salary and dividends to pay yourself. In many cases a limited company can be the most tax efficient route available. Read more about personal taxation of directors here.
- You have legal responsibilities as the director of a company
- There is more admin and a marginally higher cost in running the company due to obligations, such as submitting company accounts
- You can still be 'deemed employed' if your relationship with your client resembles employer/employee, but your company will suffer the financial consequences by having to pay employed levels of tax and NICs on any fees paid by your client to your company. This known as being IR35 caught, and HMRC can seek to recover tax going back several years.
Questions to ask yourself
- How long are you intending to freelance or contract for? (If it’s just a few months, it’s probably not worth setting up a limited company)
- Can you handle the legal responsibility of being a company director?
- Can you set up proper business to business relationships with your clients so as to avoid being IR35 caught?
- Can you simplify the admin with the help of a good accountant?
So how do you set up a limited company?
- We have a step by step guide to walk you through the process.
What are the legal requirements for limited companies?
- A limited company must have at least one director (at least 16 years old)
- A registered office in the country where it was incorporated
- A unique company name with Limited or Ltd after its name.
- A limited company must ﬁle annual accounts with Companies House and also a corporation tax return accompanied with the accounts to HMRC. The limited company must also complete an annual return to Companies House. This document conﬁrms details of the shareholders and directors of the company
- Finally, any company with an annual turnover in excess of £73,000 from April 2011 must register for VAT.
- For a more comprehensive overview of setting up a limited company download IPSE's Guide to Freelancing
- Taxation of limited companies
- How to choose the right accountant
- Limited Company Calculator for calculating profits, corporation taxes and dividends
- IPSE Supplier Directory, support businesses and services for freelancers
IPSE membership is designed for you...
If you choose to set up a limited company then IPSE can make it easy for you with IPSE Start up, visit the join section of the website for more information.
If you already have a limited company and wish to keep it, there are two IPSE membership options available, IPSE Standard and IPSE Plus. IPSE Plus gives you additional protection and resources such as PAYE audit cover, jury service cover, agency bankruptcy/default cover and access to Ashridge's renowned Virtual Learning Resource Centre. Click here for information on IPSE Plus membership.Starting Out