The difference between an umbrella company and a limited company largely comes down to the level of control you have over your contracting business.
An umbrella company is essentially an invoicing vehicle for contractors who want to avoid the administrative duties normally associated with contracting, namely issuing invoices, chasing payments from clients/agencies, calculating tax and National Insurance (NI) contributions and making payments to their bank account.
With a limited company, or a personal service company as it sometimes also known, you will have complete control of the day-to-day running of your company. You will become a director and shareholder and will have complete control over every aspect of your company including its bank accounts and financial affairs.
You can find out the difference between these two trading structures in our comprehensive guide – Umbrella Company vs Limited Company – Which is Right For You?
How do you close a limited company?
If you decide you know longer require your limited company, you can close it by having it removed from the Companies House register. To do this, you will need to apply for it to be “struck off”. This involves announcing your plans to any interested parties and HM Revenue and Customs (HMRC) and then sending a completed form DS01 to Companies House. As a limited company set up for contracting will only have you as director, you should only need to inform the following parties:– HMRC– Your business insurance– Your banking provider– Your accountant
Is there a good time to form a limited company?
It would be wrong to say that there is a right time to form a limited company. Whilst people may believe you are better off forming a limited company in April or at the beginning of the year, this is incorrect. The time of year which you form a limited company makes no difference.
What business expenses can I claim as a contractor?
A business expense is defined by HMRC as a cost which has been incurred wholly and exclusively for business purposes. By claiming a cost as a business expense, you will not pay tax on the amount.
When claiming business expenses, you should be aware of “duality of purpose”. This describes an expense which can have both a business and a personal component to it.
Typical business expenses you claim as a contractor include:
– Company formation fees
– Accountancy fees
– Business travel and accommodation: you can claim the costs of travelling to and from your place of work. Mileage rates are 45p per mile for the first 10,000 miles in any fiscal year and then 25p per mile thereafter. This allowance is to cover fuel and running costs of the vehicle. The cost of travel by public transport can be claimed, but you must have a valid receipt
– Clothing: whilst you cannot claim for your everyday clothing, you can claim for clothing which is essential for carrying out your contract e.g. protective clothing or branded uniform
– Meal allowance: You can claim meal costs when working remotely, away from your normal place of work or when staying away from home overnight
– Training: Training can be claimed for, providing it is relevant to the performance of your current contract
– Postage for business purposes
– Stationery for business purposes
– Equipment purchased for business purposes: The costs of hardware, software and any other equipment
– Business telephone calls: If you are using a telephone line solely for business purposes, then you will be able to claim any associated costs as a business expense
– Employer’s N.I. contributions
– Technical books and journals
What is income shifting?
Income shifting is a term used by HMRC to describe the practice of using another person’s tax allowance to claim tax benefit. Find out more about income shifting.
What’re the benefits of setting up a contracting limited company?
Some of the benefits of setting up a limited company when contracting include:
Tax efficiency – working through your own limited company is often the most tax-efficient method of contracting and will allow you to keep more of your income. However, again these tax advantages are wholly dependant on whether your contract falls inside or outside of IR35. If your contract falls outside of IR35 legislation, you may pay yourself a small salary and then draw dividends from the company which are not subject to National Insurance contributions. You will also be able to claim back a range of business expenses, which will enable you to become more tax-efficient.
Complete control of your business affairs – as a director of your own company, you will have complete control of your business affairs from both a financial and administrative point of view.
How do you set up a limited company for contracting?
To set up a limited company you will need to register with Companies House and undertake the process of incorporation. This involves providing Companies House with a suitable company name, an address for the company, your details as a director and a shareholder. You will also need to provide your SIC code is, this provides Companies House with a description of what your company does.Setting up a limited company is a service we provide as part of our ‘everything done for you’ limited company service.
What is IR35?
IR35 is tax legislation put in place to ensure that contractors who would be employees if they were providing their services directly, pay the same tax and National Insurance contributions as employees.
You will need to consider IR35 if you provide your services to a client through your own intermediary. This is something which we will review for you as part of our service. You can find out more about IR35 in our IR35 Guide – What is IR35?
How do you set up as a contractor?
We can help you set up as a contractor with our ‘everything done for you’ limited company service which will then enable you to take on contracts within your chosen field of employment. With this, we will assist you in setting up a limited company, which is often the most tax-efficient way of working. With our service, we will assist you in forming your limited company, setting up your business bank account, review your contract for IR35, registering your company for VAT (if necessary) and registering your company for Pay as You Earn (PAYE) with HMRC.
Why is trading through a limited company tax efficient?
You can pay yourself in the form of dividends which do not attract either employee or employer’s national insurance.
What if I already have a company set up?
Freestyle Accounting can take over the administration for you.
What if my contract fails IR35?
That contract would be treated as within IR35 and the required tax and NI would be charged. This would be after all allowable expenses, personal contributions and an allowance of 5% of invoices to cover notional expenses.
Does National Minimum Wage apply to directors?
No, it does not unless you happen to have a formal contract of employment with your limited company which would be unusual for owner-managed businesses. One of our accountants will contact you when you join to discuss the level of salary which is most appropriate for your circumstances.
Do all expenses require receipts?
Yes, except for mileage which does not.
Can I claim for working from home?
This is a complex area. A small amount (£156) is normally allowable but please see our factsheet in our Contractor Area under Articles and factsheets – Contractor Expenses – Claiming for use of home as an office.
I have a spouse working in the business. Can I take this into account?
We would provide advice on a case by case basis once we know the facts. As a general rule, it is ok to pay your spouse a small salary but: -the amount must be reasonable – must equate to what you would pay to a third party for the same duties – must actually be paid to your spouse. However, it is possible for your spouse to be a shareholder in your business and receive dividends. Please talk to one of our accountants for further advice.
Where will the registered address for my limited company be?
This will be Freestyle Accounting’s address in Coventry.
What happens when I join?
We form your company for you, and if you require, we can assist in opening a company bank account for you. We will also commence registering you and your company with all of the relevant government bodies.
How long does it take to set up the limited company?
We normally state 24 hours but in most cases, it is less than this.
How long does it take to organise VAT and corporation tax registration?
We can do this as soon as we have your contract and bank account details. HMRC can take about 4 weeks to send your registration certificate.
Our specialists have confirmed that they will report back within a week, although in most cases it is quicker than this.
If I open a company bank account via Freestyle, how long does it take?
If you use Freestyle to open an account with Cater Allen, this can usually be arranged in a week.
How is corporation tax applied?
Corporation tax is payable on business profits and is not affected by the level of dividends. Higher rate personal tax is payable on dividends over the higher rate threshold.
Does Freestyle Accounting have a ‘tie in’ period?
There is no tie in period; you are free to leave at any time without penalty. If we form a company for you and you decide to leave before starting to use the rest of the service then we would levy a charge of £125 plus VAT for carrying out the company formation.
Can I claim pre-trading expenses?
You can claim anything that you would have been able to claim whilst you were trading, and examples of such expenses are accountancy fees, rent, rates or stationery, etc. (s. 61 CTA 2009) You cannot claim the cost of a company formation as this is deemed to be a capital expense rather than a revenue expense and a tax deduction cannot be claimed regardless of when it is incurred.
Can I claim for my broadband costs via my limited company?
If the broadband connection is in the name of the limited company and any personal use is purely incidental and does not incur additional costs, then there will not be any tax or national insurance consequences. If personal use is significant, and you do not reimburse your company for the personal use, then you will be taxed on the personal use as a benefit in kind and your company will have to account for Class 1a national insurance. Where you do not have a broadband connection and you can show that this is required to do your work, then HMRC accepts that this may be claimed; where, however, you already have broadband, this cannot be claimed. (s. 316 ITEPA 2003)
Can I claim for entertainment expenses via my limited company?
The cost of entertaining clients is not tax-deductible and any input vat cannot be reclaimed. You may claim the costs of entertaining staff and their guests, up to certain limits, and provided that it isn’t merely incidental to entertaining clients. With regard to staff entertaining, you are allowed to claim the cost of one or more annual functions, as long as the cost to the company does not exceed £150 pa for each person who attends.