Setting up a Limited Company (LTD)
Contracting through a LTD company or PSC
A Limited Company or Personal Service Company is a corporate structure created to handle the tax and business accountancy affairs of one or more contractors and is self administered with the assistance of a third party accountant. All or more relevant information is registered with and held by Companies House.
The contractor becomes a director of the limited company, and is responsible for all the legal requirements that comes with this. This includes:
- Keeping good accounting records from which accounts can be prepared which give a true and fair representation of the financial position of the company
- Producing accurate accounts, filed at the due time with Companies House
- Submitting corporation tax returns to HMRC and paying any tax due
- Dealing properly with the payment of staff, deducting tax and national insurance as appropriate and paying it to HMRC by the due date
- Trading solvently, ensuring that you are able to pay the liabilities of the business. To fail to do this is to commit an offence.
Apart from the financial responsibilities mentioned above, there are other legal responsibilities for the director, such as:
- Completing and returning the annual return (form AR01 from 1st October 2009)
- Acting in the interests of the company shareholders. This means that the directors cannot enrich themselves in a way that damages the company.
Not everyone can be a company director, for example, if you have been declared bankrupt in the past, or discharged from a previous role as a director, you may not be allowed to do so.
A contractor running a limited company is responsible for ensuring all tax matters, contractual obligations and employment rights are administered correctly.
If you are a contractor working through a Limited Company and pass IR35 self employment tests, you will usually pay yourself a small monthly salary and take the remainder of your remuneration via dividends. PAYE (Income Tax), Employers and Employees National Insurance will typically be calculated by your accountant.
You will also claim back any expenses you may have incurred from the Company at regular intervals (e.g. stamps, PC equipment, etc.). For those who fall within IR35, you are allowed to claim a 5% ‘expenses allowance’.
At Company year end (typically 12 months after incorporation), your accountant will prepare your company accounts and you will be liable for corporation tax on all company profits for the previous 12 months (i.e. turnover minus expenses, salary, pension, etc.). This is payable 9 months following your company year end.
You will also be liable to pay any personal tax liabilities via the self assessment process, to include all personal income received and taking into account any ‘benefits in kind’. This liability must be met by 31st January each year (for year ending the previous April).
It is critically important that anyone working through a limited company (and being remunerated by way of a dividend structure) is not caught by IR35 self employment tests. If a contractor is caught, and therefore is “deemed employed”, tax liabilities will accrue and could potentially create a huge liability of underpaid tax.