Have you been advised that making the move from self-employed to limited might be more beneficial for you? Find below our quick step guide on how easy it is to go limited.
How to form a limited company
Forming your Limited company takes just five minutes on the SJD website. Forming your company costs £125 + VAT with your company all set up the same day – this includes setting up your company bank account and registering your company for VAT and PAYE.
Then you will need to appoint an accountant who will be able to advise you on the most tax efficient way of working through your limited company. Visit our what will an accountant do for me page for more information.
It’s that simple. For a more comprehensive breakdown on how easily you can switch from self-employed to limited, read our how-to guide below, which covers:
- The advantages and disadvantages of going limited
- Understanding self-employed and limited company tax
- The Flat Rate VAT Scheme
- Expenses for a limited company
Moving from self-employed to a limited company
If you are unsure whether you should make the move from self-employed to running your own limited company, then consider the following:
Are you expecting to earn £25,000 or more in the coming year?
If you think you are likely to be earning more than £25k a year, then working through your own limited company is the most tax efficient way of working.
Are you likely to incur many expenses?
As a limited company, you can claim on a wider range of expenses that are allowed for self-employed individuals.
What are your long-term plans for the business?
Contracting through your own limited company provides greater long-term tax planning opportunities than being self-employed.
Will your work ever expose you to a certain level of risk?
As a self-employed individual, you will be personally responsible for your company’s debts, so your personal assets could be at risk. However, as a limited company, you enjoy limited liability which protects your personal assets. Treating you completely separate to that of your business.
Advantages and disadvantages of moving from self-employed to limited
Although there are many advantages to working through your own limited company as opposed to just being self-employed, as with most things, there are both pros and cons to consider for both options.
While you’re self-employed, the level of admin needed is minimal: you only have to submit a tax return once a year. As a limited company you may have to do a little more admin work, however, SJD’s 15,000 limited company clients tell us that on average they spend around 10 – 15 minutes a month on their administrative duties. So for a few minutes of extra administrative work a month you could benefit from tax saving opportunities which make it more than worth your while.
Self-employed and limited company tax
As a self-employed individual both your business and personal tax affairs are seen as ‘one’, meaning that you as an individual are indistinguishable from your business as far as HMRC are concerned. In some ways, this makes things simple as you only have one tax return to complete annually, but it does mean that the profits from your business are classed as your income and you have to pay the appropriate level of tax on them at the end of each year. Your National Insurance contributions will also be based on your income, so you could find yourself paying higher rates of both if your profits reach a certain level in any given fiscal year.
However, as a limited company, the shareholder/s and director/s you appoint and your company are treated as two separate entities. This is particularly pertinent if you have taken on the role of director and/or shareholder, which is common if you are running the business on your own.
As a limited company you have to pay Corporation Tax on your profits at a rate of 19% and company directors pay their own income tax on the salary they draw from the company.
In order to take advantage of the tax benefits of trading as a limited company, you can choose to pay yourself a relatively low salary and leave the rest of your profits in the business. This will reduce your PAYE tax liability and your National Insurance Contributions, and you can still pay yourself additional sums in the form of dividends, which do not attract NI. This will leave you with more of your hard-earned money.
It is particularly practical to leave some money in the business if you think your earnings could fluctuate significantly from one year to the next. In the years where your profits are higher, you can leave some of your profits in your company bank account and make use of better tax planning opportunities.
Tax is complicated, particularly if you are changing the way you work, so for more information on company tax, why not read SJD’s guide to Contractor Tax.
The Flat Rate VAT Scheme
The Flat Rate VAT scheme is available to both self-employed individuals and limited companies, but it’s a great incentive to take advantage of, should you not already be using it. The Flat Rate VAT Scheme was introduced as an incentive by the government to help simplify tax. Quite simply, it allows you to charge the standard VAT rate (20%) on your invoices, but payback HMRC at a lower rate depending on your profession. Visit our Flat Rate VAT Scheme page for more information on how the scheme works and whether it would be suitable for you.
Whether you trade as a self-employed individual or through a limited company, you are able to claim the costs associated with your business against your income to calculate your profits.
Expenditure counts as a business expense if it is incurred solely and wholly through the course of doing business. For things such as travel, you can claim the costs of a car if you only use it for your work, but if you also use it for other purposes then you can only claim the percentage of its work use against tax. For many people, it is simpler to keep track of their mileage and claim for the distance travelled, which is 45p per mile up to 10,000 miles, and then 25p a mile thereafter.
You can even claim 5p per mile if you are travelling in a car as a passenger and although you cannot claim for parking fines or speeding penalties, you can include the cost of parking and congestion charges so it is important to keep accurate records about all the details of any journeys you make for work including receipts and any evidence that you might need as proof that this is a legitimate proof of your expenses.
Similarly, you can claim for rent on business premises as well as utilities such as electricity, the cost of any equipment you need to purchase for your business and a range of sundries including telephone use, bank charges, postage and stationery. You should keep note of any money you spend on your business, whether that’s on marketing or advertising or purchasing trade magazines or books which are relevant to your work.
For more information, read our guide to expenses for a comprehensive list of what you can and can’t claim through your limited company.
Find out more about contracting through a limited company
If you have any questions about going limited speak to a member of our new business team on 01442275789 or fill in the form below.