Our new blog series guides you through the different pay types, their key points and also the advantages and disadvantages of each option.
Read on to find out more about contracting through a limited company.
Choosing to set up as a limited company is a viable pay option for many contractors. Contracting through a limited company can be a tax-efficient way to work on a contractual basis. Rather than your employer automatically deducting your tax contribution, as a limited company you are responsible for calculating and sending your own tax and National Insurance Contributions to the HMRC. This does mean a lot more paperwork, but it can provide significant tax benefits.
Things to consider: IR35
IR35 Legislation – For contractors IR35 will be introduced to ensure all individuals operating via a limited company were paying the correct levels of tax. IR35 regulators assess income against tax contributions as well as the contracts between limited companies and their clients.
IR35 Test – If you are a contractor operating as a limited company you could be required to undergo an IR35 inspection. If you are under inspection, typically an inspector from the HMRC will assess the contract between your limited company and your clients.
IR35 Failed Test – If you do fail the IR35 test or if IR35 applies to your contract with your client, you will lose the tax benefits of operating as a limited company and may be forced to pay the same tax and NIC’s as a standard PAYE employee.
You can find more information about IR35 from our dedicatedIR35 Portal.
Positives of contracting through a Limited company
The most tax efficient pay option.
You can claim tax relief on business revenue expenditure.
Limited liability protection.
Eligible for Flat Rate VAT.
Perfect for career contractors who have passed IR35 tests/measures.
Negatives of contracting through a Limited company
More paperwork and self-assessments required to be completed by you.
IR35 must be considered and potentially passed.
Not suitable for short term contractors or those who fail IR35 tests.
How do I claim business expenses as a limited company?
One of key benefits of choosing to contract through a limited company is the opportunity to claim tax relief on business expenditure. So, it is important that you understand the process of claiming expenses back. Contact your employer to find out more information about how to can claim business expenses.
Conduct of Employment Regulations
Should I opt-in or opt-out?
If you are new to contracting through a limited company you may want to find out more information about the Conduct of Employment Regulations, and what option would be best for you. The Conduct of Employment Agencies and Employment Businesses Regulations 2003(Conduct Regulations for short) was introduced by the Department for Businesses, Innovation and Skills (BIS) to set minimum standards that must be provided by recruiters, for workers/contractors and limited companies.
The regulations apply automatically to contractors who are registered employees of a client. However, as a limited company, you are technically not an employee, so you have the option of opting in or out of the regulations.
What do the regulations provide?
The regulations essentially provide protection to contractors and ensure that we, the agency, will provide you with the necessary level of protection and support set out by the regulations to ensure you are protected before and throughout your contract. You can find more information about exactly what the regulations cover here: Conduct of Employment Regulations
Things to consider: Opting out
Opting out of the Conduct Regulations can have some disadvantages for contractors, mainly with the loss of the protection provided by the regulations and agency. Opting out gives us less control over your contract, which means we can’t protect you if for example there was an issue with payment from your client or any other type of dispute with the client.
Things to consider: Opting in
The most important thing to consider when choosing to opt-in to the regulations is that this could affect your IR35 status. As the Conduct Regulations apply mainly to regular PAYE employees, the HMRC could subject your limited company and contract with your client to an IR35 test. If IR35 is found to apply to the contract, you will likely lose the tax benefits of contracting through a limited company.