10th December, 2021 I’m often educated by my law trained business partner as to…
Operating Through a Limited Company
The Advantages of Contractors Operating Through a Limited Company
In the dynamic landscape of today’s modern workforce, contractors often find themselves at a crossroads when deciding on the most suitable business structure that best aligns with their goals and circumstances. For many contractors, operating through a limited company emerges as a strategic choice with numerous tax advantages. In this blog, we’ll delve into the particulars of these tax benefits, shedding light on why operating through a limited company is a smart strategy for contractors seeking to optimise their tax position.
The Tax Landscape for Contractors
Before diving into the specific advantages, it’s essential to understand the broader tax landscape for contractors. Unlike traditional employees, contractors are responsible for managing their own tax affairs and therefore, the choice of business structure a contractor operates through, plays a crucial role in how they navigate their tax requirements.
Understanding the Limited Company Structure
A limited company is a distinct legal entity, separate from its owners (shareholders). There are two primary types of limited companies: private limited companies (Ltd) and public limited companies (PLC). Contractors typically make the decision to operate via a private limited company due to the fact that the structure offers personal liability protection, meaning the financial liability of shareholders is limited to the amount invested in the company.
Tax Efficient income
One of the most attractive advantages to operating through a limited company is the ability to structure income in a tax-efficient manner. Contractors can take a combination of salary and dividends as their income, benefiting from the favourable tax treatment of dividends, leading to potential tax savings.
Limited companies are subject to corporation tax on their profits. The advantage here lies in the generally lower corporate tax rates compared to personal income tax rates. By retaining more earnings within the company, contractors can mitigate their overall tax liability.
Personal Liability Protection
Operating through a limited company provides contractors with personal liability protection. In the event of financial difficulties or legal issues, the personal assets of shareholders are separate from the company’s assets and liabilities. This means that the contractor’s personal assets, such as their home and savings, are generally protected.
Professional Image and Credibility
Operating through a limited company can help to enhance a contractor’s professional image and furthermore, can help to boost their credibility among clients. Clients and businesses often perceive limited companies as more established and reliable entities. This in affect can contribute to winning contracts and building long-term business relationships.
Increased Access to Contracts
Certain clients and agencies may prefer to engage exclusively with limited companies. By operating through this structure, contractors can broaden their scope and increase their access to a wider range of contracts. This is particularly relevant in competitive industries where having access to a diverse set of contracts is a strategic advantage.
Business Expenses and Deductions
Limited companies offer greater flexibility in claiming business expenses and deductions compared to sole traders. Contractors are entitled to offset taxable profits by deducting legitimate business expenses, including office costs, travel, training, and professional development. This can result in significant tax savings.
Control Over Finances
Contractors who operate through a limited company have greater control over their finances. They can tailor their salary, choosing when and how much to pay themselves while also applying certain tax saving strategies to optimise their income.
With the ability to retain profits within the company, contractors can build up reserves for potential future investments and business expansion plans. This offers individuals a financial cushion, providing an added layer of security and opportunity for strategic growth.
Retirement and Pensions
Contractors can contribute to a pension scheme through their limited company, enjoying the tax advantages this brings. Employer contributions to a pension are considered a legitimate business expense, reducing the company’s overall taxable profits. This approach allows contractors to plan for their retirement in an increased tax efficient manner.
Inheritance tax planning (IHT) is facilitated through a limited company structure. Shares in the company can be passed on to the owners appointed heirs, providing a smoother transition of business ownership. This contrasts with sole trader business structure, where the business is often more closely tied to the individual.
Easy Transfer of Ownership
In the event of bringing in partners or transferring ownership, a limited company structure simplifies the process. Shares can be bought and sold, and ownership changes executed more seamlessly than in other business structures.
Contractors operating through a limited company can structure certain employee benefits for the purpose of tax efficiency. This includes providing benefits such as health insurance, childcare vouchers, or company cars, all of which can be more tax-efficient when offered through a limited company.
When a contractor decides to move on or retire, selling a limited company can be a more straightforward process than transferring over a business. The company, as a distinct legal entity, can be sold, providing potential financial gains for the contractor.
The tax advantages for contractors operating through a limited company are extensive and impactful. From tax-efficient income distribution and personal liability protection to increased access to contracts and enhanced financial control, the limited company structure aligns with the aspirations of contractors seeking flexibility, stability, and strategic business growth.
As with any significant business decision, it’s crucial for contractors to seek professional advice to ensure that their chosen business structure aligns with their specific circumstances and goals. Navigating the intricacies of tax planning requires a nuanced understanding of both the contractor’s professional needs and the ever-evolving tax landscape. By leveraging the tax advantages offered by a limited company, contractors can not only optimise their current tax position but also lay the groundwork for a more secure financial future.
Looking To Set Up a Limited Company?
At WTT, we specialise in helping contractors with tax. Our team is comprised of experts in tax, legal and accounting, offering a broad range of services to individuals, corporates and trusts. From assisting with accounting processes and offering support on the life cycle of a business, to compliance advice and future planning, whatever your needs we’re here to help.
Contact us today at email@example.com or call us on +44 (0)20 3468 0000.
‘A Day in the Life of a Contractor’
A Day In The Life Of A Contractor’ helps to shed light on the key tax considerations when starting up in business, all the way to shutting up shop and unwinding your limited company.
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