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Should I bother setting myself up as a limited company?

Updated: Aug 10, 2023

I get asked this question a lot, and it really does depend on what your business type is and how much profit you are making.

I have been working with a client for a while, let's call her Jenny, and each year I prepare her tax return for her freelance work, but after a while the profits were increasing so I suggested that Jenny considered going Limited.

This was not so Jenny could avoid paying tax, but, so she could be more tax efficient - after all we all need to pay tax but why pay more than you need?

These are the top 7 FAQs I get asked by those considering becoming a limited company...

Am I paying too much tax being self-employed?

When profits are starting to creep towards the higher tax bracket (currently £50,001) it is a good idea to check if becoming Limited would help you to reduce you tax bill. It is not just tax that you need to consider, but other deductions too, such as your National Insurance contributions.

Would I be better protected?

When you are self-employed, a disgruntled Client could come after you personally if they deemed you had provided an inadequate service or product. But, as a limited company this would provide you with personal protection.

Yes, alternatively you could take out insurances for events like this, but why take the risk that they could bring you down personally?

Will my accountancy bills go up?

Unfortunately, yes. This is why I get my client to weigh up all of the pros and cons before making the decision to go Limited. For example, do the tax savings outweigh the additional costs of being limited? and if they do, then potentially going Limited might be the best fit.

What can I take out of the business?

When you are Limited company you must remember it is not your right to take money out of the business like you might do when you are self-employed. A Director can have a loan of up to £10,000 in the business before HMRC see it as a benefit and wish to charge additional charges.

Most Directors will take the maximum before national insurance as pay (currently £732 per month) and Dividends. Unfortunately you can’t take a Dividend if there is no profit but so long that there is enough profit and the companies taxes have been paid you can decide if you want to draw it all down or leave some in the business. I see this, not drawing everything down as being a big advantage in tax savings.

When you are self-employed you must pay the tax on all the profit, whilst being Limited you can work on what is being most tax efficient for you.

I have one client who has been leaving monies in the business as they were also employed, paying tax already at the higher rate but knew their circumstances would change and now they can draw down dividends and pay less tax. I have another client who added their spouse as a Director to take advantage of their tax allowances they were not utilising.

Will I need a new my bank account?

You must operate a business bank account in the name of the limited company. As said, you might be the Director and the only person in the business but it’s the company’s monies not yours.

Won’t my competitors see my accounts online?

Companies House allows us all to see the accounts of the limited company, but it is not the full set of accounts, unless you want it to be. Most people file the accounts that shows the balance sheet which does list the assets and liabilities but little detail.

Can I file my own returns?

Like with anything, "tax doesn’t have to be taxing", it just is! So why put yourself through that stress when we at Sense of Numbers can sort it for you.



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