Pro's & Cons of Contracting through a Limited Company

ADVANTAGES
1. Generally speaking its more tax efficient than employment

2. More control over your personal income: No tax deducted at source or NIC

3. You can claim valid business expenses:  Expenses lower the profit of the limited company, this decreases the tax it has to pay. This is a huge benefit for contractors because you can now claim expenses that you would not have been able to claim as a permanent employee.

4. Flat Rate VAT option:  Under the flat rate vat scheme you pay VAT over to HMRC at a rate specific to your industry, but you still charge VAT at the normal rate (20%). The rate you pay to HMRC is always lower than the current VAT rate. Bear in mind its calculated on your gross sales.

5. National Insurance Uplift: Most recruitment agencies will offer you a National Insurance (NI) uplift if you decide to contract through a limited company. If the recruitment agency pays you like a normal employee (PAYE) they will deduct Employer National Insurance tax

When you are a contractor you get paid for your services rendered, you do not get paid a gross salary which means no Employer National Insurance tax is payable by the recruitment agency. So in effect they save 12.8% tax. This is why the contractor’s rate is normally higher by 12.8% than the gross salary rate the recruitment agency will offer you.

DISADVANTAGES

Disadvantages: 1. If you don’t work, you don’t get paid: As a permanent employee you usually get permanent employee benefits like annual leave and sick leave. As a contractor you won’t have these benefits.

2. Accounting costs:  This will off course be an expense to your limited company. However if you manage your company properly then your tax savings and higher rate could easily absorb these costs so you’ll still be much better off contracting through a limited company.

3. Administrative hassle:  you’ll have some basic responsibilities as the director of a limited company. Responsibilities include the raising of invoices and payment of taxes at specific times during the year. Once you’ve got the hang of it, the tax saving of contracting through a limited company will be well worth the extra administrative tasks.

Before going ahead its important to seek professional advice, for example, IR35 affects all contractors who do not meet the Inland Revenue's definition of 'self employment'.  The IR35 rules will result in an increased tax and N.I. liability and will prevent contractor companies from retaining profits to grow their business in the future.