Choosing to work as a contractor can be a very rewarding life choice indeed and with more permanent workers suffering salary and benefit cuts, there has never been a better time to start trading through your own Limited company… And here’s why:
Take home pay
When it comes to trading as a contractor, there are two options recommended in how to do so: either through a Limited company, or through a PAYE umbrella company.
There is usually one in particular that will work best for you; so if you’re expecting to contract for over than three months or earn more than £25,000 then it may be worth considering the Limited company route.
However, the main advantage with contracting through your own Limited company, is that it will be the most tax efficient way of working. You could take
home around 75% – 80% by trading through your Limited company, whereas you could see yourself taking home around 60% – 65% with an umbrella company.
By using a contractor calculator, you could work out a rough estimate of your potential take home pay. After putting in an hourly or daily rate the calculator does the rest. The take home amount assumes full tax planning and a number of other variables, which would need to be discussed further with an accountant.
As a Limited company contractor, you are able to claim back on a wide range of expenses, and you will only get taxed for your profits, with the amount spent on your business remaining tax-free.
You must ensure that your expenses were at a cost that was made wholly and exclusively for the running of your business and by keeping hold of your receipts you are covering yourself and your business, should HM Revenue and Customs carry out an investigation. HMRC can look back as many as six years ago, so keep you receipts from this far back just in case.
Examples of some of the expenses you can claim as a Limited company contractor (outside IR35) include:
- Accountancy fees, which includes your limited company formation
- Any business travel
- The cost of work equipment
- Business telephone calls
- Business ‘entertainment’
- Computer software
- The rent, heating and lighting of your business premises
- Stationary and postage for work
- Books and magazines that are relevant to your business
- Bank charges on business accounts
- Meal allowance, which can be claimed when working on a remote site
- Employers NI contributions.
Other benefits of working through your own Limited company include:
- Being at much less personal risk compared to being a sole trader, as any financial problems that you may encounter will be considered separate to yourself.
- Having complete control over your financial affairs.
- Looking professional – certain PLCs or larger limited companies will usually only work with other registered limited companies.
If you have any other queries about trading through your own Limited company, have a look at our Contractor Limited Company Guide for further advice.