Do you need to set up a Limited Company for contracting?

July 29th, 2014  |  Published in Uncategorized

You’re probably fed up with paying too much tax through an Umbrella, or just starting out as a contractor and want to be as tax-efficient as possible. Whatever the reason, you need to know how to setup a Limited Company and what’s involved in contracting through one. If you want to get the best out of contracting through your own Limited Company, and avoid the pitfalls that ensnare the ill-advised contractor, then you need to be well informed with expert advice.

New Limited Companies can be set up the same day with Companies House, subject to their workload, we will also register you with HMRC for VAT, PAYE and Corporation tax, and provide you with all the statutory paperwork. If you provide the name you would like, I can do an online check to see if it has already been taken. Call for details.

Dividends

To see the advantages of dividends it’s important to understand how different forms of income incur tax:
A Company employee is required to pay income tax and national insurance. For a basic rate tax payer this involves paying 20% income tax + 12% Class 1 National Insurance. Tax of 32% is therefore paid on earnings. Your employer must also pay 13.8% employers national insurance.
A self-employed person must pay income tax on their profits and national insurance, for a basic rate tax payer this is 20% income tax + 9% Class 4 National Insurance + £2.50 a week Class 2 National Insurance. Tax of 29% (plus a bit) is therefore paid on earnings.
A limited company owner paying themselves entirely in dividends pays income tax and corporation tax, for a basic rate tax payer this is 0% income tax (due to the dividend tax credit) and 20% corporation tax on company profits. Tax of 20% is paid on earnings.

As you can see the limited company owner is the clear winner when it comes to protecting earnings from the taxman. The level of saving varies a for higher rate taxpayers but the advantage is still very much with being a dividend receiving limited company owner.

IMPORTANT – IR35

IR35 is a piece of tax legislation that is aimed at preventing what HRMC consider to be an employee from working via a limited company and receiving the tax benefits of paying themselves in dividends.

If you are caught by IR35 then you are required to take 95% of your companies income in the form of salary, which will incur income tax, employers national insurance and employees national insurance. This all adds up to a great deal of tax.

Who is caught by IR35?

Unfortunately there is no simple answer to this question. One of the reasons why IR35 is so unpopular is because it is so vague. Here are some warning signs though:
Your company has a single client and you are the only employee of your company
Your contract stipulates that you cannot send anyone else to do your work
You work from client offices 9 to 5 every day
Your work has to be completed at client offices and you get paid regardless of whether they have work for you to do or not

If any of these apply to you do not rush into setting up a limited company and paying yourself dividends. Get advice over your IR35 status first. It might save you a lot of tax later down the line.

 

 

 

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