Limited company contracting – the pros and cons

Whether you’re just starting your contracting career or you’ve been contracting for a while, it pays to understand your working options and the pros and cons of each. Circumstances do change over time, so what’s right for you now may not be right in the long-term.

Lots of contractors choose to operate their own limited company, often a ‘personal service company’ or PSC, which is a type of limited company. Limited company contracting is an attractive option as it often results in the highest level of take-home pay. That said, it does come with administrative obligations and the responsibility of being a company director.

In this article, we summarise the considerations of limited company contracting to help you determine the working option that may suit you best.

Advantages of limited company contracting

• Maximise your take home payOne of the biggest benefits of limited company contracting is that it often results in the highest take-home pay. The amount of salary you take, your tax liability and your National Insurance contributions all need to be taken into consideration, of course, but many people find that limited company contracting is the most financially rewarding option.
• Control is in your handsWhen you run your own company, you have complete control of your business and, potentially, more flexibility in determining your work/life balance. You’ll be able to determine the amount of salary you can/wish to pay yourself from your company’s income, and will be free to choose how much work you take on, even outsourcing some tasks if you wish. You will also be able to control your own time, taking holidays or working longer hours as you see fit.
• Wider range of business-related expensesIt’s important to understand business-related expenses and what constitutes an allowable expense for a limited company contractor. In a nutshell, however, your company may be able to offset business expenses such as directors’ salaries, accountancy fees, equipment, software, telephone, travel and subsistence, accommodation, insurance and pension contributions against income. Tax is then liable on the net income.

Points to consider when contracting via a limited company

• Administrative responsibilitiesLimited company contracting comes with a level of administrative responsibility which you don’t have when working as a sole trader or as an employee of an umbrella company. As a company director, you will have legal obligations and you’ll have to submit annual accounts. You will also have to pay corporation tax. Because the rules can be complex it can give you peace of mind to look at appointing specialist contractor accountants like Crest Plus to ensure you remain compliant.
• PenaltiesIt’s important to be aware that failure to fulfil responsibilities can result in penalties. You can also be charged interest if your corporation tax is not paid on time.
• Cost of insurance coverYou will be required to take out insurance relevant to the work you carry out and may need to take out public liability, employers’ liability and professional indemnity insurance. You may also wish to consider income protection insurance, especially if you have a mortgage or other financial responsibilities. You may find it helpful to look at insurance options provided by our insurance partner, Caunce O’Hara. They specialise in insurance services for freelancers and contractors, and are happy to provide tailored advice and guidance. One of the perks of being a Crest Plus client is that you can claim a discount of up to 20% when you buy insurance from Caunce O’Hara.
• Other working optionsLimited company contracting is only one of the working options available to you – you may also like to explore working as a sole trader or as an employee of an umbrella company like Umbrella Plus. If you work in the construction industry in the UK you may qualify to be part of the Construction Industry Scheme (CIS) which can be more favourable from a tax point of view. Find out more about CIS and whether you qualify.

For more information, please read the Crest Plus Guide to Successful Contracting and use our Contractor Calculator to find out what working options are available to you, and the difference in take-home pay between the options.

Speak to a member of our team

The right working option for you will depend on your personal circumstances and preferences, so it can be helpful to seek expert advice from our team of specialist contractor accountants. Please get in touch on 01244 684700, we will be happy to help you.