Limited Company
A Limited Company for individual contractors—often referred to as a Personal Service Company (PSC)—is a separate legal entity established by a contractor to provide professional services to clients. This structure offers limited liability, meaning the contractor’s personal assets are protected from business debts. It also allows the contractor to work independently, managing their own contracts and setting their own terms.
One of the key advantages of operating through a limited company is tax efficiency, as contractors can take a mix of salary and dividends, which may reduce their overall tax liability compared to PAYE employment. Additionally, having a limited company can enhance a contractor’s professional credibility, making it easier to secure work with larger businesses. However, this structure also comes with responsibilities, including filing annual accounts, managing payroll, and complying with HMRC regulations, making it important for contractors to stay on top of their financial and legal obligations.
Key Features of a PSC
Control & Legal Separation
The company is legally distinct from the contractor, meaning personal assets are protected from business liabilities.
Tax Efficiency
Contractors can structure their income by combining salary and dividends, which can help reduce overall tax liability compared to PAYE employment. Instead of being taxed solely under personal income tax rates, company earnings are subject to Corporation Tax, which currently ranges from 19% to 25% depending on profit levels, potentially offering a more tax-efficient approach to managing income.
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Control & Flexibility
A limited company gives contractors full control over their business, as they typically act as both the sole director and shareholder. This structure allows them to make independent business decisions without the restrictions of traditional employment. Additionally, contractors have the freedom to negotiate contracts directly with clients, providing greater flexibility in setting their rates, terms, and conditions.
IR35 Considerations
IR35 legislation plays a crucial role in determining how a contractor is taxed—whether as an employee or a self-employed individual. If a contract falls inside IR35, the contractor is taxed similarly to a PAYE employee, meaning they must pay full income tax and National Insurance Contributions (NICs) on their earnings. However, if a contract is outside IR35, the contractor can operate as a genuine business, allowing them to structure payments in a tax-efficient manner, such as through dividends. Understanding IR35 status is essential for contractors to ensure compliance and avoid unexpected tax liabilities.
Responsibilities & Compliance
Operating a limited company comes with specific legal and financial responsibilities. Contractors must register their business with Companies House in the UK and comply with statutory reporting requirements. This includes filing annual accounts, Corporation Tax returns, and VAT returns if the company is VAT-registered. Additionally, if the contractor chooses to take a salary, they must manage payroll and ensure that all tax obligations, such as PAYE and National Insurance, are met in accordance with HMRC regulations. Proper financial management and compliance with tax laws are crucial to running a successful limited company.
Who Should Use a Limited Company?
A limited company is most suitable for contractors earning £30,000 or more per year, as this level of income makes the structure cost-effective. It is also ideal for those working on long-term contracts outside IR35, allowing them to benefit from tax-efficient earnings. Professionals who want full control over their finances may prefer this setup, as it offers flexibility in managing income, expenses, and investments. However, running a limited company comes with administrative responsibilities, so it is best suited for contractors who are comfortable handling paperwork or are willing to hire an accountant to manage compliance and tax obligations.
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