Starting and running your own Limited Company is probably the most well known payment solution for contractors in the UK. Typically, Limited Companies are bought 'off the shelf', with Bank Accounts already set up from a wide range of providers for a nominal fee of around £50. It is possible to do this yourself by applying via Companies House and then setting up your own Bank Accounts but this is a time consuming process.
Contractors invoice their recruitment company/end-client each pay cycle and process their own payments. This involves: reducing their taxable income with business related expenses and then splitting their pay between: PAYE (Pay as You Earn) payments and Dividends. Net returns on gross earnings are dependent on: amount of expenses processed, the split between PAYE and Dividends and level of earnings. Limited Companies are tax effective structures for those contractors earning less than £40K per annum. Once earnings are over £40K they are subject to 45% tax irrespective of whether they are processed PAYE or as Dividends.
However, there is a deal of paperwork involved in order to comply with HMRC and Companies House regulations on an ongoing basis and a necessity to understand IR35, MSC legislation, PAYE, Dividend payments and expense processing. In addition the company director carries full responsibility to make the correct payments and reporting to the tax office. Penalties for some taxes, like VAT, can be transferred from the company to the individual in case of a default.
Hence an ever increasing number of contractors running their own Limited Companies have changed to either a Financial Management Structure or Umbrella Companies. Partly they do this to reduce the administrative headaches but also for those earning over £40K per annum these structures are far more tax efficient - just check with potential net returns using our Limited Company vs Umbrella Company Calculator.
Alternatively our partner companies are able to offer an ongoing accounting service to assist you in running your Limited Company. They ensure that you comply with all the HMRC and Companies House legislation whilst ensuring that you are maximising your net income. This reduces the risk and headache of all the tax and company reporting. For more information Contact us today!.