If you’re thinking about becoming a contractor, the chances are that you’re pondering the option of going self-employed versus starting your own limited company. There are, of course, negatives and positives for both options, but remember that a third option exists in the form of working under an umbrella contracting company, where you’ll be self-employed
Reasons to go self-employed
Perhaps the biggest reason for choosing a self-employed structure as a freelancer is that your accounting will be simple and straightforward, and you’ll only need to prepare a Tax Return once per year to HMRC. What’s more, self-employment is cheaper to run, you won’t be subject to Companies House and Companies Act requirements, saving time and money.
Reasons NOT to go self-employed
There are some drawbacks to consider, however, including having to pay National Insurance on your net profits. You’re also personally liable for all taxes, and offsets cannot be made between the CIS Tax Deductions suffered and the CIS Tax Deductions made from its sub-contractors, which can cause cashflow issues depending on the nature of your set-up. As always, having an accountant on hand will help you to alleviate some of these issues.
Reasons to choose a limited company
Next up, the reasons why you should consider incorporating a limited company. First of all, you will be separate from your business, which will become its own legal entity. If the worst were to happen and your business was liable for damages, you’d be separated from this. It is important to mention that the liability of the company owners is limited to the value of shares, but as a director, you must be responsible or you could be personally liable for taxes. What’s more, you don’t have to pay National Insurance on payments of dividends, making it a more tax-efficient option if you’re earning more than £50,000 per year. You should also think about the appearance of your business – companies prefer working with a corporate than an individual – and an offset can be made between the CIS Tax Deductions suffered and the CIS Tax Deductions made by the Company from its subcontractors, offering major cashflow advantages compared with self-employed status, depending on circumstances.
Reasons NOT to form a limited company
Finally, a quick word on the negatives of forming a limited company. Not only are they more expensive to run, but they have more complex legal and reporting duties, and your accounts must be filed at Companies House and published annually. The upcoming IR35 legislation may also apply, stopping contractors from forming companies when they should actually be employed by a company. Speaking to an accountant will help you to navigate this challenge.
There are positives and negatives to both options, so weigh them up before you start working as a contractor to ensure you’re operating in the most tax-efficient manner. Whatever you choose, we wish you the very best of luck – happy contracting!