Setting up as a Limited Company

Limited Company FAQs

Who are IAS?

Choosing to incorporate can be very tax efficient, and can mean that your net yearly pay is higher. As an interim contractor who chooses to incorporate into a Limited Company, you will be (one of) the Director(s) of said company and have the following obligations:

1. Registration (and updating yearly) records of your Company with HMRC and Companies House.
2. Setting up a Company bank account.
3. Quarterly VAT Returns (if you register for VAT).
4. Self-Assessment Tax Returns and (if applicable) Student Loan repayments.
5. Deduction of business expenses prior to calculating and paying Corporation Tax on your profits.
6. Tracking hours worked and invoicing your clients.
7. If you choose to take a salary or employ anyone else, setting up and maintaining PAYE records, paying yourself or your employees and the associated National Insurance Contributions and Income Tax deductions.
8. Paying yourself a dividend and the associated Income Tax on dividends.
9. Implementing insurance for your business (often required by your client).

Here at Interim Accounting Solutions (IAS) we are able to explain your tax and NIC obligations and execute all of this for you, smoothing the transition from employee to Company. We offer multiple service levels depending on your needs. Give us a no-obligation call or drop us an email today.

Who can set themselves up as a Limited Company?

Most people are able to act as Director of their own Limited Company (see our Important Definitions for exclusions). You will be providing services to your client and billing them through your Limited Company (business), an arrangement ideal for those working on a contract-based or interim term.
Setting yourself up as a Limited Company is different from operating as a Self-Employed Sole Trader, or through a Limited Liability Partnership or Limited Partnership. Which you choose affects your responsibilities, taxes and National Insurance Contributions, loss liability and how you can receive profits. You may find that your clients are more willing to work with one type of business structure than another as it also affects their tax and NIC liabilities. More information on the differences between them can be found at HMRC. At IAS we focus on solutions for Limited Companies.

What are the benefits of operating as a Limited Company?

A Limited Company is a very tax efficient way for a contractor to operate, and also allows you to leave money in your business for withdrawal at a later date. As Director, you may withdraw money from the business as a combination of salary and dividends – dividends are not subject to national insurance, therefore maximising your income.
As the Director of your business, you and the Company are separate legal entities. The business can own property, and shares in other companies. As a shareholder in your Limited Company, your losses are Limited – you can only lose the value of your shares in the business and are not liable for the business’ debts (providing as the Director your actions are legal under company law). Bank loans may require a personal guarantee. For your clients, it also reduces their liability if your tax status is questioned by HMRC.

How do I set up as a Limited Company?

IAS are here to guide you through this process – we can even do this for you.
You will need to register your company name and office address with Companies House and form Articles of Association.
Your registered office can be your residential address or another address. Different rules apply to businesses formed in Scotland to England and Wales.
Your registered address (not residential addresses) must display a sign indicating it is the company registered office. Be aware that some residential mortgages and rental agreements will also have restrictions on whether you are able to use your residential address as a commercial operation.

What should be included on an invoice to my clients?

By law, invoices should contain the following information. If you are VAT-registered, there are additional requirements.

What insurance do I need as a Limited Company?

Generally, there are three types of insurance that a Company needs to consider.

1. Professional Indemnity Insurance (PI) - covers actions brought against the Company for claims of negligence. Requirements tend to range from £250,000 – £5 million.
2. Public Liability Insurance - covers claims from third parties if they have suffered because of your actions. Requirements of £5 million of cover are common.
3. Employers Liability Insurance - covers actions brought by an employee for employment-related illness or injury. Not required if you are the only employee and you own at least 50% of the shares. Often your client will require this (£5 million).

Can I return to permanent employment after incorporating?

You can transition back to permanent employment and cease trading of your Limited Company. IAS are here to provide advice throughout the entire life-cycle of your Company.
If you have set up a PAYE scheme, you can generate and use a P45 to determine your tax code with your new employer. Otherwise, you will use an Emergency code until HMRC can confirm your correct tax code. Any overpayment can be reclaimed at the end of the tax year (or any underpayment paid).

Where can I find more information?

Give us a no-obligation call or email us. We can help to determine if incorporating is the right move for you.
Information from Companies House.
Information from HMRC.

Important Definitions

Limited Company

Limited Companies are legal entities owned by one or more shareholders, and may be split into Private Limited (Ltd.) and Public Limited (PLC) categories, depending on whether shares are offered to the public (PLC) or not (Ltd). Limited companies must have a director and registered office.
Many interims and contractors choose to set themselves up as a Private Limited Company, as these require only one member (but can have more), whereas Public Limited Companies must have at least two shareholders, two Directors and a qualified Secretary, and must issue share capital of at least £50,000.

Director

Director(s) are (an) officer(s) appointed by the Limited Company’s shareholder(s) to run the Company. The director may also be the shareholder, and can hold up to 100% of Company shares.
The Director has legal, financial and administrative obligations. Directors must be over the age of 16, and not have previously declared bankruptcy or been disqualified as a Company Director.
You may or may not have a formal contract of employment with your Company – this determines if you are an employee. For tax and national insurance purposes, you are treated as an employee of the Company. We at IAS can help introduce you to Employment Law Specialists to determine if setting up formal contracts of employment are right for you.

National Insurance Contributions (NIC)

Both Employer and Employee may be liable for NIC. Employee’s NIC is deducted from the salary/bonus paid to the Director/employee. Employer’s NIC is payable by the Company on the salary/bonus.
Employee NICs are not required if you take a salary up to the NIC lower earning limit (LEL) (£112 per week), and then taking the post-tax business profits as dividends.
Employee NIC of 12% is due on earnings over this limit.

Income Tax

Tax payable on income by an individual

Corporation Tax

Tax paid on a business’ yearly profits after allowable business expenses

Incorporation

The process of setting up a Limited Company and registering with Companies House.

PAYE

Pay As You Earn – a system for paying income tax and national insurance on a real time reporting basis.
Must be implemented by your Company if you pay yourself a salary over the lower earnings limit (£112 per week), or employ anyone else.

Personal Allowance

Amount of salary that can be received not subject to any income tax.
Currently £11,000 (2016/17).
Personal allowance is lost at a rate of £1 for every £2 in excess of £100,000 in income.

Tax Year

April 6th 2016 – April 5th 2017

Financial / Fiscal Year

The financial year for your business

Paying yourself

How does it work?

You may receive money from your company in three ways – through a salary (including benefits), as a dividend, or through a Director’s loan (not covered here). How you choose to do this affects your tax liabilities.
You will need to decide what level of Salary to pay yourself once your Company starts trading. If you choose to pay above the Lower Earnings Limit (£112 per week), you will be required to register as an employer with HMRC and operate PAYE.

PAYE

What is PAYE?

As an employer, your Limited Company must operate PAYE if you are paid more than £112 per week (LEL). You will need to run payroll on and deduct income tax, employee NICs and potentially Student Loan Repayments (on earnings above the student loan repayment thresholds, if a student loan remains outstanding). You will need to report these to HMRC before each payday (real time information).

As Director of my own Limited Company, am I an employee?

Initially, Directors are officers of the Company rather than employees. As an officer of the Company, you are treated as an employee for tax and NIC purposes.
You are not an employee of the Company unless you have a contract of employment. You should seek legal advice before drawing up such a contract.
If you are an employee, your Company must abide by national minimum wage and national living wage requirements (£6.70 / £7.20 per hour) depending on your age (21-24 or >25 years old), and provide statutory benefits.
HMRC IR35 legislation can affect how your Company earnings are treated (see below).

How much salary should I draw?

At IAS we can determine the optimal amount of salary drawn and dividends paid to minimise your tax liabilities.
Paying a low salary and a high dividend can maximise your income, but may trigger an investigation by HMRC.
Salary paid by the Company is an allowable business expense before Corporation Tax is calculated.

What do I need to do as Company Director?

You are responsible for maintaining PAYE records under Real Time Information. You must deduct PAYE and NIC from salaries, and pay them to HMRC.
You must also report employee benefits and expenses to HMRC (Forms P11D and P11D(b)) by 6 July after the end of the tax year.

IR35

What is IR35?

IR35 legislation affects workers who supply services to a client via an intermediary – including many contractors who work for a client through their own Limited Company.
IR35 applies if – without the intermediary – you would be classed as an employee of your client. Therefore, the contract between the client and your Limited Company must be carefully considered to determine if IR35 applies.
If IR35 applies, HMRC are able to consider all Company income as the Director’s salary and thus subject to PAYE and class I NICs. Certain expenses are deductible from this income. A 5% reduction for general expenses from the total IR35 income received by your business is also allowed, but the additional NICs and income tax may reduce your take-home pay significantly.

How do I know if it applies to me?

You must assess every client contract to determine your IR35 status.
General information about IR35 is available from HMRC.
While we cannot personally advise you on individual contracts, IAS have a range of partners in areas such as financial advice, insurance, legal advice and IR35 guidance so we can offer our clients introductions to trusted partners.

Dividends

What is a dividend?

A payment made to shareholders if the business has made enough profit. As a shareholder in your limited company, you can receive a percentage of the company profits as a dividend.s

When, and how often can I declare dividends?

If justifiable in reference to the company accounts – your post-tax profit amounts you may declare dividends.
You must hold and record a directors’ and shareholders’ meeting to declare the dividend.
The dividends declared must be available for distribution.
There is no restriction on how often they may be declared. Most commonly this is done once or twice per year.

Are dividends taxable?

Dividends are paid from company profits after tax – therefore Corporation Tax has been paid on the dividend amount by the company. Income tax is also required over a certain amount.
The first £5,000 of dividends a shareholder receives in a tax year are exempt. Over that, the rate of tax depends on your other income after deducting the personal allowance of £11,000 (2016/17) from their total income.

1.
Up to £32,000 total income – 7.5% tax on dividend income.

2.
Between £32,000 and £150,000 32.5%.

3.
Over £150,000, 38.1%.
Dividends are exempt from NIC – reducing your overall tax burden.
You can decide to leave money in the Company for future use and can choose when to pay your dividends to efficiently plan your taxes.

Pensions

Can my Company contribute to my pension?

Yes. This is a very tax efficient way to receive money from your company, in many cases pension contributions count as an allowable expense before Corporation Tax.
Your pension scheme must be approved and operate under HMRC guidelines.
You can also get tax relief on your pension contributions as Director or employee.

Paying your Taxes

How does it work?

Your business must pay Corporation Tax on its profits, and may be required to pay Class 1A NICs on benefits for employees. If a PAYE is required, your business must deduct income tax, student loan repayments and employee NICs for its employees. As Director of a Limited Company, you must register and send a personal Self-Assessment tax return every year if you received any income or benefits from your company.

Corporation Tax

What is Corporation Tax?

You must register your business for Corporation Tax within 3 months of starting to do business. Corporation Tax (20%) will be due on the business’ profits. Profits are calculated as turnover minus allowable expenses and benefits. You must complete form CT41G (sent to your registered office after you incorporate) to register the company for Corporation tax.

How do I pay Corporation Tax?

You must complete an annual tax return (CT600) to HMRC online and submit a signed set of accounts.
Corporation Tax uses the fiscal year.
Payment of Corporation Tax is due 9 months after the year end. (Earlier dates may apply in the first year).

How can I ensure I pay the optimal amount of Corporation Tax?

Corporation Tax is due on company taxable profits after all business expenses have been deducted from the business’ turnover.
Allowances and Reliefs may be available, including

i.
Capital allowances

ii.
Research and Development Relief

iii.
Patent Box

iv.
Relief for creative industries

v.
Disincorporation Relief

What business expenses are can be deducted before calculating profits for Corporation Tax purposes?

Certain business expenses may be offset against your Corporation Tax. These must genuinely be incurred “wholly and exclusively” for the purpose of the business, and any expenses that have a “dual purpose” area generally not claimable.
This means that any allowable expenses are deducted from your profit BEFORE corporation tax is calculated and deducted, rather than after. In essence, deducting allowable expenses from your profits before tax is applied increases your final profit by 20% vs deducting expenses after tax.

How do I report expenses?

You must keep exact receipts for all business expenses. HMRC may request these, and so you should keep them for 6 years. The expenses will be reported in your yearly accounts.
Receipts must be in the company name. Where contracts are established these should be between the company and the service provider. Reimbursements of expenses claimed by the director may trigger additional tax due.
You will report your expenses to HMRC either online or through commercial payroll software, or you may send forms to HMRC by mail.

Which forms do I need to complete and when?

Forms P11D and P11D(b) are due by 6th July after the end of the previous tax year.

What expenses are claimable?

The list of claimable expenses is extensive. Below are some of the general categories that are claimable (for full conditions you must check with HMRC).
When you use IAS we are able to check every claim to ensure that your expenses claims are fully compliant with HMRC legislation.
Any personal use of these expenses must be purely incidental and “not significant”. Many of these expenses must be purchased directly by the company, and not by the director and reimbursed.
Claiming certain expenses may trigger a ‘Benefit in Kind’ to arise, and thus obligate you to prepare and submit P11D to HMRC (yearly).
General categories that are popular with our contractors include Child Care, Telecommunications, Pension Contributions, Insurance, Legal, Accountancy and Professional costs, Travel and Subsistence (away from your usual place of business), and Training and Professional subscriptions.
Certain categories require in depth advice before you choose to pay for them through your company, including purchasing a vehicle and health and fitness memberships.

Claimable Business Expenses: Child Care

Up to £243 per month may be claimed for care of your child or stepchild, up to the 1st of September following their 15th birthday (16th if disabled).
Care must take place at a registered and approved childcare facility (child-minder, nursery, play-schemes, out-of-hours school scheme) or in the child’s home under a Government scheme.
You may not claim for care by a relative.
The scheme must be offered to all staff.

Claimable Business Expenses: Business Travel

Claims for regular commuting costs are not allowable, but you may claim for travel to and from a temporary workplace for a maximum of 24 months.
Travel to a temporary workplace may be claimed for up to 24 months. You must expect to be at the site for less than 24 months when you accept the contract to claim this allowance. Any new site for the same client must be significantly different – at least 10 miles away.
If you spend less than 40% of your time at the temporary workplace, or a site other than your main workplace, the 24-month rule does not apply.
The journey must be for business purposes only. Tickets and receipts must be kept.
Non-business journeys reimbursed by the company are paid through payroll and are subject to income tax and NIC. If the cost is met directly by the company it is subject to Class I NIC.
Car rental for business journeys – a mileage log must be kept.
Use of your own (business-insured, roadworthy) vehicle for business purposes – a mileage log must be kept for reimbursement of travel using your own car, bike or motorbike. An additional £0.05 pence per mile is allowable for carrying colleagues. Parking, toll and congestion charges are also allowable (not fines or penalties).

vi.
Car – £0.45 per mile (first 10,000 miles), then £0.25 per mile.

vii.
Motorcycle – £0.20 per mile.

viii.
Bicycle – £0.20 per mile.
Reasonable subsistence (meal, accommodation and incidental) expenses during travel away from your normal place of employment whilst on business are allowable.
Incidental costs of £5.00 per night (UK) / £10.00 (outside UK) are allowable.

Claimable Business Expenses: Costs of doing business

Premises Costs and Communications

ix.
Costs of running business premises, such as rental, business tax, utility costs are allowable.

x.
A flat rate of £4 per week / £18 per month can be claimed for use of a home office. Records are not required. Alternatively, exact costs are claimable, depending on the number of rooms used and time spent – records of space used and time used for are required.

xi.
Office supplies and consumables, postage costs are allowable.

xii.
Business call costs (but not line or phone rental) from your home phone or personal mobile telephone are allowable. Itemised bills and records of call purpose are required.

xiii.
Call costs and line rental from a dedicated business line (installed by the company), internet subscriptions, and one mobile phone per household are allowable provided the contract is between the service provider and the Company, and any personal use is not significant.

xiv.
Business entertaining costs are not an allowable expense for the Company.
Staff Costs

xv.
Salaries paid to you and staff are allowable.

xvi.
Employer’s National Insurance Contributions are also allowable.

xvii.
Annual party expenses may be claimed up to £150 per head. Must be open to all staff. Partners allowed (for all staff) and claimable.

xviii.
Pension contributions are exempt from NIC. Specialist advice is necessary.

xix.
Where you are required to use a visual display unit, you may claim the cost of an eye test. If a corrective prescription is required reasonable costs are allowable.
Professional and Training Costs

xx.
Costs of forming the limited Company are allowable.

xxi.
Work-related training is allowable. Costs include learning materials, examination, registration fees and associated travel and subsistence costs. Details of the expenditure, together with the time spent in the course of travelling each respective day must be provided.

xxii.
Publications, trade journals and magazines subscribed for by the Company for the director/employee to carry out their duties of employment are allowable.

xxiii.
Subscriptions paid to professional bodies, or learned societies, for the better performance of your and your staff’s duties of employment are allowable so long as the body/society is recognised and approved by HMRC.

xxiv.
Employer’s Liability, Public Liability and Professional Indemnity Insurance costs are allowable. Legal, Accountancy and Professional Costs are allowable. Self-Assessment Tax Return preparation costs are not allowable.

Business expenses that may trigger a benefit in kind.

A benefit in kind is required to be declared on the P11D and your Self-Assessment Tax Return. It will trigger Class 1A NICs by your company.
Which expenses can trigger a benefit in kind?

xxv.
Gym memberships

xxvi.
Purchase of a vehicle
Where an expenses counts as a benefit in kind, this can trigger NIC requirements to be paid on the value by your company. These can be substantial. Consider whether it would be better to purchase these yourself. Talk to us at IAS about the most tax-efficient way of maximising your take-home pay.

Income Tax

What are the Income Tax rates I should be aware of?

For 2017/17 the following rates apply

i.
Personal allowance – income up to £11,000 – 0% taxbr />
ii.
Basic rate – income £11,001 to £43,000 – 20% tax

iii.
Higher rate – income £43,001 to £150,000 – 40% tax

iv.
Additional rate – income over £150,000 - 45% tax
You get all of these allowances, e.g. if you earned £90,000 per year, the first £11,000 would be not be taxed, the next £33,000 would be taxed at 20%, and the final amount would be taxed at 40%.
For high income earners, the personal allowance is lost at £1 for every £2 above £100,000 earned.

How does the high income child benefit charge (HICBC) apply?

Where one spouse earns above £50,000, child benefit is subject to claw back (fully clawed back by £60,000) at the rate of 1% of the child benefit received for each £100 earned above £50,000.
HICBC is assessed through the highest earner’s Self-Assessment Tax Return. Income for these purposes is Adjusted Net Income (taxable income less gift-aid and pension contributions).
You may elect not to receive Child Benefit at all.

Self-Assessment Tax Returns

If you need to complete a Self-Assessment Tax Return you need to register with HMRC and complete a form SA1 to obtain a Unique Taxpayer Reference (UTR).
Your Self-Assessment Tax Return is due online on, or before, January 31st following the end of each tax year. Paper returns are due October 31st.

Student Loans

How do I repay my Student Loan?

Different rules apply for loans taken out pre- and post- 1998, and post 2012. For post-1998 Student Loans, HMRC collects repayments – through PAYE or your Self-Assessment Tax Return. Plan 1 repayments are collected from the April following leaving your higher education course and are set at 9% above your income of £17,495 p.a (or £21,000 p.a. for Plan 2 loans taken out post-2012).
Repayments through your Self-Assessment Tax Return are due by the end of January following the end of the tax year.
Unearned income (dividends and interest) above £2,000 p.a. also count towards your loan repayment calculation.
Repay your Student Loans through your personal bank account.

Can I make Voluntary Contributions?

Yes, but you will still owe your yearly calculated amount as well.

National Insurance Contributions

What are National Insurance Contributions for?

NICs ensure your entitlement to State Pension and other Social Security benefits. You must pay them for a certain number of years to receive full state pension on retirement.

What is the difference between Employee and Employer contributions?

Employee contributions are primary NICs. You must pay these. Your employer (your company) may be required to deduct these from your salary and forward to HMRC through PAYE depending on the level of salary taken.
Employer contributions are secondary NICs.

How much can I earn before I need to pay employee NICs?

You can earn £112 per week (Lower Earnings Limit) before you are liable for employee NIC. Above this, you incur a rate of 12% until the Upper Earnings Limit (£827 per week), and a further 2% on earnings above this.
Your employer (your company) pays Class 1 NICs at 13.8% based on your pay and benefits above the Secondary Threshold (£156 per week, or £8,112 per year).
The way in which NIC is calculated for directors is different to the calculations for employees, but the amount paid is the same. The calculation for directors is based on an annual earnings period rather than the normal pay periods (weekly or monthly) used for employees.
There are two methods for actually calculating NIC for directors. The first is the standard method under which the total salary/bonus from the directorship are added together, NIC is calculated on this total amount. The alternative method is to calculate the NIC due on a payment-by-payment basis as for any other employee. When the final payment of a director’s salary/bonus in the tax year is being made the NIC due must be reassessed on an annual (or pro-rata annual) earnings period.

VAT

Do I need to register for VAT?

You may choose to register your business for VAT with HMRC. You can only charge VAT if your business is registered for VAT. If you register your business for VAT, you must charge VAT. You must complete a VAT return (to HMRC) quarterly.
You must register for VAT if your business’ UK sales (including zero-rated but excluding VAT-exempt) total more than £83,000 in a rolling 12-month period (VAT does not follow the tax year). The deregistration threshold is £81,000.

Which VAT accounting scheme should I use?

There are several accounting schemes for paying VAT, depending on your business’ turnover. These include the VAT Annual Accounting Scheme, VAT Cash Accounting Scheme, and the Flat Rate VAT scheme. The Flat Rate scheme is applicable to most contractors operating as a limited company.

What is the Flat Rate VAT scheme?

As Director of your VAT-registered limited company, employing yourself, you are able to charge your client VAT at the standard 20% rate for the services provided by your company. HMRC introduced a ‘flat rate’ of VAT payable by your company (on the full amount including VAT charged to your client), dependent on the sector you operate in. You may keep any difference as profit. An additional 1% discount is also received in your first year.
You must complete a quarterly VAT return and pay any VAT due.
The rate for your company will depend on your sector, and ranges from 4% - 14.5%. The full table of business categories and up to date VAT rates may be found at HMRC.
If you register for the Flat Rate scheme, you may not claim back VAT on purchases of goods or expenses – excluding certain capital asset purchases (on a single receipt) totalling greater than £2,000 (including VAT), but not covered by the capital goods scheme.
Your annual turnover (VAT exclusive) for your first year must be less than £150,000, and in subsequent years less than £230,000.
You must keep up to date VAT records of sales and purchases, keep a VAT account and issue VAT invoices. VAT records must be kept for 6 years.

FAQ's

Interim Accounting Solutions

Setting up as a Limited Company

Limited Company FAQs

Important Definitions

Paying yourself

PAYE

IR35

Dividends

Pensions

Paying your Taxes

Corporation Tax

Income Tax

Student Loans

National Insurance Contributions

VAT

Important Dates and Timelines