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Limited Companies: Next >>
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Your Options:
Contractors have four main options when deciding which financial arrangements to use. They are:
[1] PAYE - i.e. the contractor is an employee of the agency (not tax efficient)
[2] Umbrella Company - now caught by the MSC rules
[3] Composite Company - now caught by the MSC rules
[4] Limited Company
We do not consider PAYE on our website as we have assumed most contractors will wish to pursue the more tax efficient options available to them. We explain below how limited companies work. To find out how the Umbrella Company and Composite Company options work, visit our "Umbrella" and "Composite" sections.
Limited Companies:
Unlike umbrella companies and composite companies, a limited company is set up purely for you. Usually you will be the only shareholder and the only employee. It is a way of trading that many self employed people use. They do so because it is a tax efficient way of operating. They draw a modest salary from their limited company on which PAYE is operated and then pay the rest of the limited company's profits out as dividends. They do this because dividends are not liable to PAYE or employer's or employee's NIC.
For the long term contractor, limited companies have a number of advantages over umbrella companies and composite companies. We discuss these later. First we look at the drawbacks.
Drawbacks:
For the long term contractor, the drawbacks of the limited company are niggles in comparison with the drawbacks we identified in our "Composite" section.
Set up costs:
You can usually get into and out of a
composite company without any charge. This is because when you join a
composite, it already exists. It does not have to be set up. You are just
added as a new employee and a new shareholder. Similarly, when you leave a
composite, it does not have to be dissolved. You are just removed as an
employee and shareholder. However, with a limited company, you will need to
pay to have the company incorporated and you will need to pay to have it
dissolved. However, these charges may not be that large and may be
insignificant when you assess how much tax you will save in a
limited
company.
Admin:
You will need an accountant and a company bank account for your limited company and you will need to keep books or find somebody to keep them for you. You will need to raise invoices to your clients and be responsible for collecting the money.
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Full index of pages:
Home Page IR35 Background - page 1 IR35 Background - page 2 IR35 Background - page 3
IR35 Rules - page 1 IR35 Rules - page 2 Beat IR35 - page 1 Beat IR35 - page 2
Beat IR35 - page 3 Beat IR35 - page 4 Ltd Company - page 1 Ltd Company - page 2
Ltd Company - page 3 Ltd Company - page 4 Umbrella Companies - page 1
Umbrella Companies - page 2 Composite Companies - page 1 Composite Companies - page 2
Composite Co - page 3 Composite Co - page 4 MSC - page 1 MSC - page 2 IR35 Insurance
IR35 Investigations - page 1 IR35 Investigations - page 2 Contracts - page 1
Contracts - page 2 Contracts - page 3 Resources 1 Resources 2 Resources 2 Sitemap
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