Setting up and working through a limited company is attractive, with the potential for lower taxes and more take-home pay. However, there are also many responsibilities and potential pitfalls, especially for low-income workers who may be less familiar with running a business. This article provides an overview of working through a limited company aimed at helping low-income workers understand the key considerations.  

What is a Limited Company?

A limited company is a legal business structure separate from its owners and directors. The ‘limited’ refers to limited liability, meaning the owners’ personal assets are usually protected from the company’s debts and liabilities.  

To set up a limited company in the UK, it must be registered with Companies House and have at least one director. The company can then hire employees, enter into contracts, and conduct business activities. Any profits made belong to the company, not directly to the owners/directors. The company must comply with various legal obligations such as filing annual accounts, paying corporation tax on profits, and following director pay and dividends regulations. Directors have legal duties around properly managing the company.

Key Differences from Self-Employment

Working through a limited company is very different from being self-employed:

• The company is a separate legal entity. Money coming in belongs to the company, not you directly. You cannot simply declare company profits on your tax return.
• As a company director, you are an office holder, not self-employed. Any pay relating to your duties as director must be subject to PAYE/NICs.
• You cannot just pay yourself from the company at will. Salaries and dividends have specific rules around them.

Why Low-Income Workers Get Limited Companies

Some employment agencies or umbrellas pressure temporary workers to set up limited companies, often with accountancy services included. This avoids agencies having PAYE responsibilities and can generate fees from the accountancy services. The worker may have little choice if they want assignments from that agency. However, the worker takes on significant legal, tax and administrative responsibilities as a director.

Key Things to Know as a Director

As a director and shareholder of your own limited company, you will likely need to:

• File annual accounts, tax returns, and confirmation statements for the company
• Pay corporation tax on company profits. 
• Keep records of the company’s financial activities.
• Pay yourself a salary subject to PAYE/NICs
• Pay remaining profits as dividends with proper process.

You will probably need also to submit a personal Self Assessment tax return. 

Getting Paid from a Limited Company 

Money is paid to the company for its services rather than to you directly. As an employee, the company will pay you a salary, subject to PAYE/NICs if above the threshold. The remaining profits can be taken as dividends following proper procedure. You cannot simply take money from the company bank account as your own. Rules around directors’ pay and dividends must be followed.

Using an Accountant

While accountants can assist with meeting your company’s obligations, as director, you remain ultimately responsible. Accountancy fees can significantly reduce any financial benefits of having a company. Take care to choose an accountant with suitable qualifications and experience. Understand what is covered in their fees and any binding contracts or penalties. 

If you are ready for a change and looking for proactive services, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.

IR35/Off-Payroll Working Rules  

Special tax rules apply if your company provides your services as a contractor and you effectively work as an employee of the client. This can override the normal company dividends tax treatment. The rules are complex – seek expert advice here.

Closing Down a Company

Closing a company that has never traded can be simple by applying to strike it off. Otherwise, proper steps must be taken, or issues can persist for years. Accountants may charge extra for this. If facing issues, contact HMRC’s Extra Support or the charity TaxAid for help.

Key Considerations

Before deciding to work through a limited company, low-income workers should consider the following:

1. Taking on significant legal, tax and administrative responsibilities
2. Whether you have the knowledge and skills to meet these responsibilities
3. Realistically assessing whether financial benefits outweigh extra responsibilities/costs
4. Implications for mortgages, pensions, and welfare benefits entitlement 
5. Whether IR35 rules could eliminate tax advantages anyway

For low earners, operating through a company may not be suitable or beneficial. Seek independent advice from a qualified professional before proceeding. Be wary of agencies pressuring you into arrangements you’re not comfortable with.