Working through a limited company
Limited companies are cheap and easy to set up. But working through your own limited company is very different from working through an agency or umbrella company or just being an employee or self-employed. You therefore need to consider all the factors before making a decision to set one up (or allowing one to be set up for you).
What is a limited company?
A limited company is a way of running a business. But it is not the only way – you can also run a business as a ‘sole trader’ for example, which is an individual in business on their own account, or in partnership with others, where several individuals who are the ‘partners’ run the business together.
Sometimes you may not really consider that you have your own ‘business’ at all but may still be asked to work through your own limited company by an intermediary in the temporary employment industry, like an agency or umbrella company (see question below 'How do lower paid agency workers end up in limited companies'). In this situation the services you provide when you are on an assignment could be thought of as the ‘business’ of your limited company.
A company is a legal entity in its own right, and must be registered at Companies House. It is owned by its shareholders, who own shares in the company. If you have your own company it is likely you will be the only shareholder.
A company will usually be run by at least one director. Note that if you work through your own limited company, you will probably be both the director and the sole shareholder. You should be very wary if someone sets up a limited company for you with other directors and shareholders as well as you.
You can find more information on setting up a limited company on GOV.UK.
Running a limited company is not straightforward. In some cases, due to the administrative requirements, a company is not a suitable way for new businesses to trade at all, particularly if there is only modest income involved. It is important you understand what it means to set up a limited company and whether that is the right thing for you and your business. It can be an expensive mistake if you then have to pay someone to close it down for you (and deal with any compliance issues that have cropped up in between).
Is being a company director the same as being self-employed?
No - there is long standing confusion about the difference between self-employment and being a director of a limited company.
When someone has been working on a self-employed basis (i.e. as a sole trader) and their business begins to develop, the next step can often be to incorporate and provide their services via a limited company. Once someone begins to work through their own company, they are no longer self-employed, even though they may carry on doing the work in a similar way to the way they have always done.
This means that once you have a limited company, you cannot simply think of your company’s money as your own as you may have done with your business’ money when you were self-employed. You also cannot simply declare your company’s money on your next personal tax return in the same way you would have declared your self-employed earnings. The money belongs to your company – not you – and that changes everything!
(Confusingly, for Universal Credit purposes, there is a look through the limited structure and directors of their own companies are usually treated as self-employed. UC is different in this respect to legacy benefits and income tax. We explain more on our specialist website Revenuebenefits.
What are the main reasons people decide to work through a limited company?
There are many reasons why a business may operate as a limited company. These include:
- The ‘limited liability’ protection. The ‘limited’ bit of a limited company means that, in most cases, you should not be personally liable for any financial losses made by the business (as compared to a sole trader who could be liable for the debts of their business to the full extent of his personal assets). But if you have no private assets to protect or are unlikely to be taking big risks or building up big debts, then this may not be a significant benefit to you.
- Having a limited company can help present a professional image, which may be important if you have a business that you want to develop and grow.
- You may have lower overall tax and National Insurance (NIC) costs. This is usually because you will receive income from the company in both salary and dividend form and dividend income is taxed more favourably than salary as it is not liable to NIC. Also, corporation tax rates for small companies are generally lower than most income tax rates (more on this below). There can be some disadvantages to receiving money from the company as dividends rather than wages or salary. Dividends are regarded as investment income and not employment income– for example, they were not recognised as ‘pay’ for the purpose of the Coronavirus Job Retention Scheme during the pandemic, which meant that support grants for directors were limited.
- Some clients may require you to work through an intermediary such as a limited company or an umbrella company, as this saves them money (there is no PAYE obligation and no employer costs such as Employer NIC when paying a company). They may also be hesitant to work with someone who is just a sole trader, as HMRC may do a PAYE enquiry and find that the individual should have been treated as an employee. Having an intermediary (such as a limited company or an umbrella company) between them and the individual provides them with protection against this.
How do lower paid agency workers end up in limited companies?
Historically, some lower paid agency workers have been encouraged into or put into limited companies by agencies/umbrella companies, typically in one of two ways:
The driving force behind having a limited company at some point in an agency worker supply chain, is usually to increase profit/reduce obligations on behalf of another entity in the chain. If an agency or umbrella pays a limited company rather than a worker, then it is a business to business transaction and they do not have any ‘employer’ costs or responsibilities, which can save them money (which may then be shared through the supply chain). There can also be an additional revenue stream created, from the fact that most workers in limited companies will need help from an accountant with running the limited company and so can be charged for this service.
If you work through an agency or umbrella company and aren’t sure if you have a limited company set up, you should double check with the agency or umbrella company. You could also search for your name at Companies House.
What are the main things I need to be aware of if I work through a limited company?
People who have their own limited company will be a director of their company and generally also:
- the shareholder of the company and
- the employee of the company.
The company itself is a separate legal entity to its directors, employees and shareholders.
The company is usually contracted to provide certain services and the director (in their capacity as the company’s employee) carries out the services.
As such, each year, your company will need to:
- file annual accounts and an annual confirmation statement with Companies House
- submit a company tax return to HMRC
- pay any corporation tax it owes on its profits
- keep detailed financial records of the business’ day to day activities
As a director/shareholder, you will probably need to prepare a Self Assessment tax return in your personal capacity each year.
To the extent that directors get a salary from their own limited company, this should be paid via the Pay As You Earn (PAYE) system.
You will also need to keep an eye on the level of the limited company’s business income and regularly check to see whether the company needs to register for VAT, as the VAT regime applies to all businesses including companies.
In addition to all the admin, there are many rules about the duties of directors, and their actions are subject to scrutiny by the courts. For example, as a director of a limited company, you must try to make the company a success, using your skills, experience and judgment and follow the company’s rules, shown in its articles of association (the companies’ internal rulebook).
You can find more information on director's responsibilities on GOV.UK.
How do I get paid if I work through a limited company?
If you work through your own limited company, the limited company will be hired to do the work (either directly or via an intermediary like an agency/umbrella company), and then you, as an employee of the company, will carry out the work on behalf of the company. Invoices for your services will be issued by the limited company, not you. Money coming in will belong to the company rather than you and should be paid into the company’s bank account and not your personal bank account.
As an employee of the limited company, the company will probably pay you a small salary (to make use of the tax and National Insurance thresholds). The limited company will usually need to register as an employer with HMRC and take income tax and NIC from your salary under the PAYE system depending on the level of salary paid.
The limited company profits, that is the remainder of the money paid to the company (after deducting your salary, any other business expenses such as travel, telephone etc. and also the corporation tax due, if any), will probably be paid out to you as a dividend. A ‘dividend’ is an income payment a company can make to its shareholders if it has made a profit. There are formalities to observe when paying out a dividend (or extracting money in other ways from your company). If a dividend is not paid out, then the money can be used to reinvest in the business.
As we explain above, if your company is hired to do some work which you carry out on behalf of the company then this is not being done on a self-employed basis. This means you cannot just pay yourself wages without having to worry about PAYE.
However, there is no reason why a company director cannot also have a completely separate self-employment which is nothing to do with their company. For example, Sarah has a company which carries out plumbing services and also has a small-scale cake-baking business which is carried out on a self-employed basis. However, it would be unusual for directors to contract back to their own companies on a self-employed basis. This is due to the rules that exist around receiving money from a limited company if you are a director.
Directors are ‘office holders’ which means that any money relating to directorial duties must be subject to PAYE. For other company work NOT related to the role of director, in theory, it may be possible for them to do this on a self-employed basis, by being hired by their own company to carry out the work on its behalf. But this would only usually happen if they have some real specialist skill unrelated to the company's normal business and they provide this to other businesses as well as their own, for example. This would be very unusual in a personal service company scenario, particularly for those on relatively modest incomes, therefore we do not consider the possibility any further in our guidance.
The IR35 rules/off payroll rules may cause some confusion as to whether you are self-employed. These rules are very complex but basically say that if a director looks like an employee of the end client they work for, but for their limited company, then they should pay the same level of tax/NIC as an ordinary employee.
You can fall outside of these rules if you look like a self-employed person working for the end client rather than an employee (as per the general status tests). But this ‘self-employed’ determination only applies for the purposes of deciding whether IR35/the off-payroll rules apply. It does not change the actual position of the director as regards the nature of the income paid out to them by their limited company - it would still be salary/dividends etc.
Can I use an accountant to help me with the admin?
Yes, but even if you pay someone to do all the admin for you, as a company director, you are ultimately responsible for ensuring that it is correct.
There may be significant costs involved in using an accountant and this can substantially reduce any financial benefit of trading as a limited company (see above). Therefore, you should make sure that you understand the basis on which fees will be calculated and what they will cover. In particular, make sure you understand if there are penalties if you sign up to pay for a ‘package’ of services on an ongoing basis, but want to leave early.
Many people call themselves ‘accountants’ but they may not actually have any professional qualifications. It is vital that you take care when choosing an accountant.
If you are asked to work through a limited company by an agency or umbrella company, you may find that they arrange limited company accountancy services for you, and so you do not get to choose the accountant yourself. You should still make sure that you understand whether the accountants are suitably qualified and what the fee arrangements are.
Special tax rules: IR35/off payroll working
If your limited company supplies your services, then in certain circumstances you will have to consider the impact of the intermediaries’ legislation, also known as IR35/the ‘off payroll’ legislation.
How can I close down a limited company I have set up?
This depends on whether the limited company you have set up has ever actively traded. If a limited company has never actually traded in reality (that is, it has never issued an invoice and has never received any income into its bank account), then you should apply to strike off the company from the Companies Register by completing a form.
You should send a copy to HMRC with a covering letter explaining that the company has never traded and request that HMRC close down the corporation tax record.
In any other case, you need to take the appropriate steps to ensure that the limited company is closed down properly otherwise you could be left with messy limited company and corporation tax compliance issues that could follow you around for years.
If you are paying for accountancy services, you should be aware that they may not be prepared to deal with closing down your limited company as part of their normal fee.
If you try to deal with things yourself and get stuck (for example, because there are outstanding corporation tax (or VAT or PAYE) issues which mean HMRC object to the striking off) but cannot afford to pay accountancy fees, the tax charity TaxAid may be able to help. HMRC’s Extra Support team may be able to help you with any outstanding corporation tax (or VAT or PAYE) requirements but will be unable to deal with Companies House. You can read about how to contact the Extra Support team on our website.