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When should you go limited?

Kerry Hull

Kerry Hull | Marketing Manager

Wednesday 24th Apr, 2019

The decision to go limited is not one any contractor should take lightly, but it can be hard to tell when the time is right. We talk you through the factors you should consider to make this choice.

Forming your own limited company can have many significant advantages. It can offer a better work-life balance, make you a more attractive option for an agency looking to place a contractor, be a more tax efficient way to work, and it provides some legal protection as your business is a separate legal entity, so it’s liable for its own debts. However, that doesn’t mean it is for everybody.

Going limited at the wrong time can be more trouble than it’s worth, and might also be less tax efficient depending on how much you’re earning. As such, the decision to form your own company isn’t as important as when you choose to do so. Too soon, and you won’t be reaping any of the benefits. Too late, and you’ll end up paying more in taxes than you need to.

We’re here to help you decide. There are a number of factors you should consider, some will be a personal choice and some will determine if working as a limited company is even an option for you, such as your IR35 status, prior to making the decision you should always talk to a professional accountant, such as PayStream.

Here are some of the indications that the time is right for you to go limited:

Contracting is your career move

If you are new to contracting, or are just trying it out whilst in between permanent roles, then you can either set up a limited company, work through the agencies payroll, or through an umbrella company. If you do choose the latter options initially you can always set up a company later down the line once you know how long you will be contracting for.

Although it can seem daunting, transitioning from an umbrella company to running a limited company can be simple and straightforward with the support that is available.

For those who have decided that contracting is their new chosen career and have already made the leap from permanent work to contracting, setting up a limited company could be the better option. There are many factors involved in deciding if a limited company is for you or not, such as, what you earn, a piece of legislation known as IR35, how much control you’d like over your finances, etc but if contracting is your long-term plan – read on to find out more.

You’re earning more than £150 per day

There’s no hard and fast rule about how much you need to earn before going limited however the higher you earn, the more likely you are to have more control over how, when and where you carry out your work and the more likely you are to fall outside of IR35. Higher paid individuals are less likely to be; supervised whilst carrying out their work, directed in the way that the work needs to be carried out and controlled in regards to dictating how they go about their work. This is why the amount you earn per day, is an indicator as to what your IR35 status may be. And only those who fall outside IR35 will see the benefit of working as a limited company contractor.

That’s not to say that a contractor earning less than £150 per day would not fall outside IR35, however when you start to look at accountancy fees vs tax efficiencies you may find that you won’t actually end up saving all that much per year.

If your income is around £150 per day or more and you are outside IR35, most accountants would agree you are earning enough to make going limited worthwhile, by being a limited company you will be able to work more tax efficiently by paying yourself a mixture of salary and dividends.

For many people, increased tax efficiencies is the main advantage of going limited, however, bear in mind that doing so will lead to more admin for you, especially if you don’t have the support of an accountancy service provider that specialises in the way that you work.

You’re struggling to get contracts from bigger clients

If you want to really grow your contracting career, you will probably want to start looking towards securing bigger clients. You might already be putting yourself out there, but struggling to get anywhere with large, established companies. If you’re wondering why this is, it might be because you aren’t limited.

Even though nothing needs to actually change about your offering once you go limited, the fact that you have a registered company is something that provides larger businesses with an element of security. It shows you are established and have experience, and also makes your contract a simpler business transaction.

In fact, some companies will only work with freelancers if they are limited as a matter of policy. You might think going limited changes nothing about the actual services you provide, but to large, multinational firms it can make all the difference.

So what’s next?

If this sounds like you, and becoming a limited company contractor feels like the right move, then speak to an accountancy service provider that specialises in this area. Companies House, HMRC and legislation such as IR35 can be tricky to navigate so you need to ensure that you are being guided by someone who is specialised in this area.

Companies like PayStream have the knowledge and experience to provide help and advice that is relevant to the way you work. This means you can be safe in the knowledge that your limited company is in safe hands, leaving you to focus on what you do best, winning contracts.

Read our free guide:

What are the advantages of setting up a limited company?

Download here