A Guide to Contractor Limited Companies

For any new contractor or freelancer creating and running a limited company may seem like a difficult and daunting task. But like most things in the finance industry once you understand how things work the process can be extremely easy.

It’s important that you are well organised and if you require professional advice seek this early. There are many professional bodies and websites that can help clarify any questions you may have. These include;

Another good source of information is fellow contractors because if you have these questions then chances are they have gone through the same process and have valuable answers and recommendations.

Many new contractors think that by going down the limited company route it is going to be a lot more expensive, this isn’t alway the case. But it’s easy to understand why some people think this with the setup costs and accountancy fees.
I’d suggest everyone read the following information from HMRC as it explains a the process of starting a new limited company if you understanding what’s required it is easy to find cheaper or faster solutions.

In a recent video interview, I interview Paul Rawlings from Nimbus Accounting about what are the benefits are to using a Limited Company compared to an Umbrella Company. He also shared some great information about how to be more efficient when it comes to paperwork.

Transcription of the Interview

Greg Dickson: We’re here with Paul Rawlings from Nimbus Accounting today to talk about how to choose an accountant when you’re a contractor or freelance, and some of the differences between a limited company and an umbrella company. So, Paul, thanks for joining us today.

Paul Rawlings: Thank you, Greg Dickson.

Greg Dickson: No problem. What are the primary benefits and differences when using a limited company compared to the more traditional umbrella company?

Paul Rawlings: Well, coming from an accountant point of view, it’s all down to tax. In an umbrella company, it’s not tax efficient. You spend a lot more money. You’re just being taxed as an employee, you also have the additional cost of employers national insurance, because you’re suffering that as well.

So, the biggest thing, if you’ve got your limited company is, of course, the tax efficiency. I think umbrella companies came about as helping contractors overcome the substitution clause, in that if an umbrella has got hundreds of contracts, then potentially they could send a substitute for another contract.
Which, if you’ve got one contract in one limited company, it makes it difficult to say that someone has got equal skills, and they can perform that role.

So that’s the only benefit I see that an umbrella company gives you, for protection of IR35. It obviously does a bit of paperwork for you, but at the end of the day, that’s nothing really.

Greg Dickson: So a limited company isn’t an affected by IR35?

Paul Rawlings: Oh no, no, it still is. Oh yeah, it all still accounts for that. Even an umbrella company is affected by IR35. But what the umbrella company is trying to mitigate is the substitution clause.

Greg Dickson: Right.

Paul Rawlings: It’s just bringing it to reality, actually.

Greg Dickson: That means you can’t send someone else in your place, is that right?

Paul Rawlings: Yeah. So, all contracts now – and it’s important that you look at the reality rather than just the wording – so all contracts and all contractors should be able to send a substitute in their place.
So someone should be able to turn up on a Monday morning and say, “Well, I’m here from ABC limited to do this job.” The client should be happy because that client isn’t employing an individual. They’re employing the company.

That’s the same with the umbrella company. What they’re doing is the umbrella company is, of course, the contracting company, and they’re sending someone to that client. But with the umbrella company, because they’ve got a whole host of, say, IT contractors under their books, then potentially on a Monday morning, the actual client, could have anyone turn up. All they’re employing is the umbrella company to send someone to work.

However, the reality is the umbrella company, and the limited company is still sending the same individual to do the same work.

Moving from Umbrella to Limited

Greg Dickson: Okay. Excellent. So, say, if I was in a situation where I was with an
umbrella company, what’s the general process to change from an umbrella company to a limited company?

Paul Rawlings: It’s all to do with the contract. So at the moment, your contract is with the – the umbrella company holds the contract. So you need to see what kind of clauses there are for you to leave, and then you need to go to your client, the end person, and say, “Right, can we reissue this contract to my new limited company because I’m no longer trading through the umbrella company?”

Greg Dickson: Okay.

Paul Rawlings: It should, is as simple as that.

Greg Dickson: Okay, excellent. So when you’re looking to form a limited company,
what is the process and what sort of expenses come up from that?

Paul Rawlings: It’s very straightforward. You can go on the internet and form your own Company today. I had one client who formed a company; it cost
him £5, and then they got £50 back. So I think both…

Paul Rawlings: Yeah, I know. I mean, there’s a business model somewhere there.

Greg Dickson: Possibly flawed.

Paul Rawlings: Yeah. But I think what you get from that is a Barclay’s bank account,
so the kickback is from Barkley’s that you have one of their accounts.

So, you obviously need to set up a limited company, that fee, and then there’s the accountancy fee. I wouldn’t
recommend someone does that on their own, and a monthly accountancy fee can run from anything from £70 to £150 per month.

What to look for in an Accountant

Greg Dickson: Okay. Now when sort of looking for a new accountant, what questions should you be asking them to make sure that you’ve got a good fit?

Paul Rawlings: Well, I think everyone’s quite price sensitive, so fees first, how much they’re going to charge you. But then prices can reflect lots of different things. You could pay someone, an accountant, say, £69 a month, but potentially all you’re then getting is a call center at the end of the day. So you can phone up, speak to a
different person each time, and potentially you’re not speaking to an accountant.

So, if you were to pay more, I think the more money you pay, the better quality you’re going to get. So if you’re going to go for an accountant, then you need to make sure that the person who initially signs you up is the person that’s going to sort of act for you throughout. Because what lots of firms will do is the big chief will go along, win the business. But then someone a couple of levels down from then will be the person you interact with day in, day out.

So you want to know who you’re going to speak to everyday if you’ve got a query. It’s that person you wish to spend a bit more time getting to know before you sign up with the accountant.

Greg Dickson: Would you be looking for accountants that have experience in the contractor marketplace?

Paul Rawlings: Yeah, I’d go for one that specializes in contractors, because you want a contract review. So you need an accountant to sit there, go through your contract, and see whether you fall within or outside of IR35.

I think with the contract review, it almost takes it to another level now with the business entity test that the revenues introduced, so that’s highly important. Again, you need to take that test, and which an accountant should be able to sort of give you the questions, and that should be another review point in a discussion you have with your accountant.

Limited Company Expenses

Greg Dickson: So how do your direct expenses relate with limited companies? If you look at the umbrella company model, everything is sort of offset by your expenses. Is that sort of similar?

Paul Rawlings: Yeah, I think most umbrella companies really only take into consideration travel and if you can justify any other, say, direct expenses. So if you’re running your own limited company, potentially you’re going to attract a lot more expenses than you would do within your umbrella company.

So potentially there are going to be lots of computer equipment, I imagine, if you’re an IT contractor, and you’ve got your own computer equipment which you work on, and that’s going to be an expense billing to company. Same to travel, obviously the accountancy fee is going to go in there.

So there are a lot more expenses that would be claimable, as long as they’re incurred in the course of business as a limited company, more so than an umbrella company would pay you.

Greg Dickson: Obviously that would make the year-end more efficient, the amount of tax that you owe. The taxable income will be less

Paul Rawlings: Yeah. The net profit in the company is going to be lower, so your corporation tax liability will be reduced.

Greg Dickson: Excellent. Now talking sort of with other contractors, one of the biggest complaints when using a limited company is the sheer amount of paperwork. Do you have any suggestions, a way that people can be more efficient or manage the paperwork?

Paul Rawlings: Well, everyone says there’s a lot more paperwork, but there shouldn’t be if you’ve got a good accountant. So at the end of the day it’s the accountant who should be making sure that you’re keeping your receipts or recommending systems for you to do that. So on the receipt front there’s Receipt Bank. There are
lots of third-party products out there that can help you manage that. The other paperwork…

Greg Dickson: What’s Receipt Bank?

Paul Rawlings: Receipt Bank is a company where you can scan a receipt and they will enter that onto another accounting product. You can send them emails, again, with receipts attached, and they basically do all
the analyzing the receipts for you. They scan all of the invoices and put them on a on-line database so you can always access them.

So the rule is you have to sort of save all your receipts for six years. But being a contractor, traveling around a lot,
working hard, you might lose your train ticket, you might lose your Petrol receipt. Where if you just sort of snap it with your phone and send it over to Receipt Bank, they’ve got a scanned copy of it and they process it all for you.

Greg Dickson: That sounds useful.

Paul Rawlings: Yep.

Greg Dickson: Yeah. Then sort of day-to-day managing of the account, sort of software packages that you suggest to your clients?

Paul Rawlings: Yeah. We always suggest Zero, and there’s an integration with Zero and Receipt Bank. So on Zero there are live bank feeds, so everything can go through there. So if you are quite disciplined with how you run your business and pay everything on business cards, then when it comes to the bookkeeping element of your accounts, you can do it in minutes.

So gone are the days when you needed spreadsheets, sitting there, tapping away all of your expenses, and putting everything into columns. That’s back in the ’80s. But today it’s all about online software, and Zero is by far the leader in that.
Especially with the integration with Receipt Bank makes it a lot easier. There shouldn’t be any physical tapping on the keyboard. Everything is done with the click of a mouse.

Greg Dickson: I like the sound of Receipt Bank, because you can just do it as you’re sitting on the train or whatever. It’s one of those things, you just email it all the way through.

Paul Rawlings: Well, that’s it. Yeah. I think they’re turnaround is 24 hours, so if you send your receipt in, in 24 hours’ time it will be sat in Zero. When you reconcile it to a bank transaction, or if you’ve paid for it personally, to just pay off through the director’s loan account.

Expected take home for limited contractors

Greg Dickson: Yeah, brilliant. So let’s talk about what figures and what you’d expect. Now say a contractor has got a contract for £100,000 a year, what would they expect for their take home? That’s a pretty tough question but…
Paul Rawlings: Yes, well there’s obviously lots of variables. So if you as a contractor, one director, and one shareholder, with £100,000 contract, you should be looking at paying an effective rate of tax at about 29%. So potentially you should be taking home about £71,000. So £100,000 contract, you should take home £71,000.

Now obviously the other option, which is what lots of people do, and you need to be careful with this in that you are not income shifting, is obviously husband and wife. If your wife is genuinely involved in the business, you can gift as a husband, or even as a wife you can gift to your spouse shares, and that’s tax exempt from capital gains tax.

So as long as you’re not shifting income and they’re working in the business, then potentially on that same £100,000 contract, rather than taking home £71,000, you could take home £82,000. So you’re then looking at an effective tax rate of 18%.

Greg Dickson: You’d essentially be paying your spouse or partner a wage.

Paul Rawlings: Yeah, a wage. If they’re an equal shareholder. What I say there is if you’re going to do that, there needs to be some reality to it. Don’t just do it for tax avoidance because that’s not allowed and you can’t be doing it for income shifting.

Income shifting

Greg Dickson: Income shifting is…?
Paul Rawlings: Income shifting is basically the husband saying, “Well, I want the wife to utilize the wife’s allowance, and I’m just going to give her all the money. So give her 50% or my shares. But what I’m going to do is once I pay her a £20,000 dividend, I’m going to take it back and I’m going to spend that money.” That’s income

5 Tips when starting a Limited Company

  1. Make sure your company name is available. You can do a search at companies house to make sure no one has this name. If you’re going to actively trade and market under this name it would be a good idea to make sure that the domain name is available and there are no trademarks on this name. I would also recommend making sure that you secure social media profiles for this name you never know what will happen in the future


  1. I try to avoid filling out forms whenever possible and HMRC don’t make it easy in regards to telling you which forms they need filled out. So by using a formation agent or getting your accountant to do it you save a lot of time and effort for a small fee. Most formation agents will only charge around £25 to do it all for.


  1. For the majority of contractors and freelancers a business plan is not necessary so don’t waste your time in doing one. Many banks still asked to see a one when setting up business accounts but just explained to them the nature of your business and what the limited companies is used for and they should move on from this question.

If possible use your accountants or a PO Box as the companies registered office as all your businesses information which Companies House hold is freely available and the amount of promotional material you receive generally increases when you become a director and limited company. There have been situations where people have opened credit accounts from using the details in companies house.

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