How to form a limited company

Monday, 03 June 2013 06:39

Limited company contractors are required to keep detailed and accurate accounts.

Limited company contractors are required to keep detailed and accurate accounts.

If you are confident that you will fall outside of the IR35 regulations and would like to minimise your tax burden, then you should be looking to operate as a limited company contractor. But how do you go about setting up a limited company?

Why should you set up a limited company?

Some clients prefer to deal with contractors who are working through a limited company. As a result, you will find there are more contracts open to you if you choose to operate in this manner.

Furthermore, it is also more financially beneficial to work as a limited company contractor, as it allows you to reduce the amount of tax and National Insurance you are required to pay. This is because you can withdraw money from the company in the form of dividends and directors' loans, while taking a minimal salary.

Another benefit of a limited company is that it stands as a separate entity from yourself. As a shareholder, you are not liable for company debts and so there is a level of protection if the venture fails to take off.

Choosing a trading name

Your business name might seem like a trivial matter, but there are some important things to consider when choosing one.

You should check that there is not already a company operating under the name you wish to go with. A good idea would be to use the free online company search available on the Companies House Website.

One consideration that should be made is whether you will be imposing a geographical restriction on your company through its name. While it can sometimes be beneficial to advertise where you are based, the nature of contracting allows you to claim expenses for travel and so it is often possible to take contracts all over the UK.

Register with Companies House

The official step of registering your limited company with Companies House can now be done online, as well as by post or with the help of a formation agent.
It costs £15 to complete the online form and it takes 48 hours for your company to be registered in this way. Postal applications take between eight and ten days, costing £40, but there is a same day option available for £100 if you make sure your application reaches Companies House before 3pm.

Bookkeeping and accounts

When operating as a limited company, it is necessary to keep detailed and accurate accounts for each financial year and HMRC requires that you store them for a minimum of five years.

Because the vast the majority of contractors will not be used to bookkeeping or making tax and National Insurance payments, there are a number of companies that offer accountancy services to assist with these processes.

Limited company contracting is the most tax efficient way of operating for those working on a freelance basis and these companies will help you to know what expenses you can claim, the level of salary you should take and how to withdraw funds as dividends or directors' loans.

As limited company directors are also required to complete a personal tax return each financial year, this is another aspect where you will be able to receive assistance.



Finance articles

  • How to form a limited company

    If you are confident that you will fall outside of the IR35 regulations and would like to minimise your tax burden, then you should be looking to operate as a limited company contractor. But how do you go about setting up a limited company?

  • Umbrella vs limited company – which is right for you?

    If you're looking to become a contractor, then you need to consider the two main options open to you – operating as a limited company or using an umbrella company. However, you must also be aware that this decision may be taken away from you.

  • How does the 24-month rule impact those utilising umbrella companies?

    The 24-month rule is something most people have come across, but many will admit they do not fully understand what it is. However, it is particularly important and must be considered when submitting paperwork to HM Revenue and Customs (HMRC).

  • What allowable expenses are available for the self-employed?

    Working for yourself makes for an incredibly exciting career choice. Not only do you get the chance to set your own hours and choose the projects that excite you the most, but it enables you to operate in a highly tax-efficient manner. Being self-employed also potentially allows you to receive a significantly higher income in comparison to doing the same kind of work as a permanent full-time employee, most notably as you could off-set tax against the expenses that you incur.

  • How the forthcoming Real Time Information system will affect reporting payroll data

    Being a contractor gives professionals the freedom to select their own working hours and choose the projects they work on; however, with that comes the need to look after their own payroll and tax issues. With HM Revenue and Customs (HMRC) set to introduce a new payroll reporting system later this year, now is the time for professionals to make certain they are aware of the changes this will entail.

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