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Limited Company FAQs

Becoming a contractor and starting your own limited company can be incredibly rewarding, but also confusing! However, with the assistance of a professional accountancy service that you can trust, the whole experience can be a breeze!

The Bluebird Accountancy team have answered the most frequently asked questions about setting up and running a limited company as a contractor. Please have a look below.

If your question has not been answered, don’t panic. Our professionals are on hand to answer your queries, either on the phone (0808 301 2389) or by completing our short contact form.

What is a limited company?

A private limited company is a legal entity which has its own assets, liabilities, profits and losses. This protects the owners from financial liability if the company encounters any financial liabilities.

A limited company can be the most tax efficient way of operating as a contractor if you work outside IR35, as you are able to able to legally pay less income tax and National Insurance by taking your income through a combination of salary and dividends.

Is there a lot of paperwork for a limited company?

Compared to umbrella, there is more administration with running a limited company:

  1. Paying your taxes – Corporation Tax paid annually, quarterly VAT Returns and Personal Tax that requires filing an annual self-assessment.
  2. Invoicing and payroll – this can be made simple by setting up online accounting.
  3. Completing and submitting your Confirmation Statement (CS01) to Companies House – your accountant can complete this information on your company; it must be submitted annually on the anniversary of your company’s formation plus a 14 day grace period
  4. Annual Accounts – comprising all your company accounts (i.e. profit and loss statements, P60 and P11D) to send to HMRC and Companies House annually. These are first due within 21 months of your company’s incorporation date, and within nine months of your Accounting Reference Date thereafter (usually the end of the month in which you incorporated).

Tasks such as those mentioned above can be made simple by hiring an online contractor accountant, so you can have support and peace of mind in the administration of your limited company.

What expenses can I claim through my limited company?

Expenses that can be claimed for tax relief are those that have been incurred during the running of your company, for example:

  • Employee wages
  • Pension Contributions (only through an approved scheme)
  • Employers’ National Insurance Contributions (NICs) payable on company employee salaries
  • The cost of travel to a ‘temporary workplace’ that is not regarded as ordinary commuting (no claims are allowable when you are engaged at the same ‘temporary workplace’ for over 24 months).
  • Subsistence costs (accommodation, food, laundry etc.) whilst away from your contracted place of business for work purposes only. Please note that those who work inside IR35 are not able to lawfully claim travel and subsistence expenses and receive tax relief on them.
  • Travel and parking costs: mileage allowance (if using one’s own vehicle) of 45p/mile for the first 10,000 miles, and 25p/mile thereafter. For bicycles, you may claim 20p/mile.
  • Training course fees as long as the skills and training are directly relevant to the business.
  • Stationery, postage, and printing costs for business purposes.
  • Business insurance, such as Professional Indemnity Insurance, Employers Liability, and Public Liability.
  • Work telephone and broadband packages (if the contract is in the company name).
  • Work mobile and smartphones(if the contract is in the company name).
  • Home office costs(a flat £4/week without receipts is allowed by HMRC, or calculate a proportion of the household bills to claim).
  • Computer equipment and software.
  • Costs of advertising and marketing your business.
  • Business gifts up to £50 per individual are allowable before more complex rules apply.
  • Incidental overnight expenses of £5/night (£10/night if overseas) can be claimed as a flat rate if you are working away from home.
  • Authorised bank charges, e.g. standing charges each quarter.
  • Christmas party exemption for directors and employees of up to £150 per person per year (you can include your partner or spouse) are classed as an exemption.
  • Professional fees, such as accountant or solicitor.
  • A limited number of professional subscriptions, if allowed by HMRC.
  • An eye test for employees who use computer equipment for work.

If I am inside IR35, are there any benefits to trading through my own limited company?

Most people in this position would be better suited to working through an umbrella company. Ideally, there are more tax benefits for working outside IR35, but if you are inside IR35 you shouldn’t assume that operating through an umbrella is always the answer. There are still many benefits from trading through a limited company.

What if I decide to go permanent?

Moving from contracting to permanent employment is quite simple. If you think you’ll return to contracting in the future, you can make your company dormant for the time you are working permanently. If you believe you will no longer need your company, you can simply close it down.

Do take home pay calculators really provide an accurate estimation?

Yes, as these online calculators allow you to calculate the amount of take-home pay you earn per hour and divide it by the number of hours worked. This can be used to cover the annual year or single pay period.

However, you can obtain an even more accurate calculation by speaking to the accountancy provider who gave you the initial calculation. They will be able to take into consideration any expenses you might claim and other circumstantial information that could refine your calculation further.

The Bluebird Accountancy Contractor Calculator will provide you with an honest and instant take-home pay projection.

What are dividends?

Dividends are the amounts left in the company’s bank account that are available to distribute, after all, business expenses, liabilities and Corporation Tax and income tax has been paid. These must be distributed and allocated to each shareholder on the percentage amount agreed e.g. if you own 20% of the company shares, you will pay yourself 20% of the distributed dividends.

You must document all dividends that are distributed to shareholders via dividend vouchers.

How often can I pay dividends?

It is advised that you pay dividends monthly or quarterly, although you can pay yourself as frequently as you like. You must be able to provide you have the paperwork documenting the dividends, so HMRC cannot dispute that you are paying yourself a salary.

We recommend that clients hold dividends and wage payments separate, paying each shareholder individually. This will show a transparent and accurate account of dividend distributions.

What insurances will I need?

By law in the UK, it is required that every business that employs one or more staff must have Employers’ Liability insurance in agreement with the Employers’ Liability Act 1969.

This ensures that if an employee falls ill or injured as a result of working from your company and wish to claim compensation, then the insurance covers this.

The only businesses that are excused from this Act are government departments and non-limited family businesses.

The fines for business not having Employers’ Liability Insurance can be up to £2,500 per day.

If you are the sole director and employee of your company, insurance is not necessarily a legal requirement, but it may be a contractual requirement for your role.

What is corporation tax?

Owning a limited company requires you to pay Corporation Tax on the company’s profits. Corporation Tax rates fluctuate in line with legislation, but as of 6 April 2017 it sits at 19%.

The deadline for filing your Corporation Tax Return is 12 months after the end of your company accounting period. The deadline to pay your Corporation Tax bill is usually nine months and one day after the end of the accounting period.

Do I still have to pay my accountancy fees if I don’t work for a month?

If you are inactive due to a gap in your contract, you will simply pay £25 +VAT per month for Bluebird Accountancy’s inactive service. If you are a Bluebird client and wish to go on our inactive service, please contact your Account Manager.

How does a limited company differ from a sole trader?

Regarding a limited company, the company is liable for any financial liabilities so as a director and shareholder your personal liabilities are limited. However, working as a sole trader there is little distinction between yourself and the business. Therefore, if your business goes into debt then your personal assets are not safe – meaning your home, savings and any other assets inside and outside the business could be at risk.

It can also be more financially straining to operate this way; it’s harder to obtain financing and investment as a sole trader due to the lack of an established legal entity.

Who owns the company and who runs it?

Limited companies are owned by one or more people, entities or companies. If a company is owned by shares its owners are known as ‘shareholders’ as they each share a segment of business ownership.

Are company owners/shareholders also directors?

It is not legally required for shareholders to be directors but often this will be the case as they tend to want a say in the day-to-day business operations (but this is not always the case). If shareholders so desire, they can appoint directors of the company to manage these day-to-day operations.

In the contracting and freelancing industry, a limited company usually comprises of one shareholder who is also the sole director and employee of the company.

Do I have to trade immediately?

With Bluebird Accountancy, you do not have to start trading immediately. Once you have opened the company, registered it for taxes and set up a business bank account you will be ready to trade whenever your contract begins. You will not be charged our monthly fee before you start trading through your company.

Can I use any name?

Yes, your company name can be at your discretion provided that it is not an existing company name or trademark, and is not offensive or appears to be in connection with government or local authorities (unless you get permission).

What are the set-up costs?

Setting up a limited company through Companies House incurs a one-off charge of £12, but you can get your company set up for free with Bluebird Accountancy when you use our online accounting service.

How do I open my limited company?

With Bluebird Accountancy you can open your limited company via the online sign-up page or call one of our consultants directly to join.

What are the running costs?

The Bluebird Accountancy monthly fee is £95 +VAT.

What is a director's service address?

A director’s service address is an address whereby limited company directors may have their individual business mail and notices from Companies House and HMRC delivered. For contractors, this can coincide with the Registered Office Address of their limited company.

Will I need an accountant?

Having an accountant isn’t mandatory, and there are plenty of online accountancy software providers that can make it easy to manage tasks such as bookkeeping and invoicing. However many contractors use an online accountant to take care of many administrative tasks that are hard to understand or that they simply don’t have time for. Plus they can save you time and money by providing you with the support you need for a low monthly cost.

What happens when I wish to close my company?

Once you no longer need your company, you can close your company down and have it struck off the Companies Register if it meets the following criteria:

  • Hasn’t traded in the last three months
  • Hasn’t changed names in the last three months
  • Isn’t threatened with liquidation
  • Has no agreements with creditors

Alternatively, you can complete a Members Voluntary Liquidation (MVL) which is usually more tax efficient.

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