Tax benefits of contracting as a limited company
In part 3 of our Contractor Advice series we have invited Marc Morris, of 1st Option Accountants, to return and give another interview, this time focusing on the tax benefits of being a limited company contractor.
Before you read Marc’s full article, feel free to watch ther video below:
Unlike a PAYE employee, contractors that have set themselves up as limited company directors have a far greater flexibility in the way that they manage their income - in short they can benefit from their contracting revenue in a number of ways.
Over the long term a limited company will be tailored to a contractor’s individual circumstances keeping personal financial goals in mind. This might be as simple as making most of the income available as salary, investing for retirement or seeking to generate cash pot in the short term future.
Specifically contractors generate tax efficiencies from 5 main areas:
- Expenses - compared to a PAYE employee, a far wider range of expenses can be claimed. These include purchasing capital equipment, claiming utility costs, business travel, training texts and courses, entertaining clients and others. The additional tax relief possible can create significant economies over the course of a year.
- Bank Interest - since statutory liabilities are not paid over to HMRC at the time of earning but collected later in the financial year, a contractor is in a position to earn interest on funds up until the time when those payments become due.
- VAT Flat Rate Scheme - The FRS is a government concession aimed at small businesses that seeks to simplify VAT collection in the UK. It permits a company to keep a small proportion of the VAT that it collects on its invoices which over a period of time can result in significant financial benefit.
- IR35 status - This infamous tax tests whether revenue earned from contracting should be treated as employed or self employed income. If an assignment passes the tests, the contractor will be in a position to declare a lower salary and elect to receive a proportion of their income as a dividend, thereby reducing the level of National Insurance contributions
- Income splitting - A contractor can share the income earned from assignment work with their spouse/partner and thereby benefit financially if the second person is subject to a lower rate of tax.
Despite these attractive possibilities, a limited company is not for everybody. Where contracting is expected to last for a very short period of time (for example as a “stop-gap” between permanent employments) or when the contracting rate is relatively low rate (and a contractor needs to receive all funds as salary) it may well be inappropriate to incorporate or at least provide no great economic benefit. In addition some contractors are simply not comfortable in becoming legally responsible for a company of their own. In these cases, joining an umbrella structure is likely to be a more sensible course of action
Tags: 1st option accountants, benefits of contracting as a limited company, Contracting as a limited company, How to start IT Contracting, IT Contracting, IT contractor advice, Jenrick IT, limited company contractors
