Contracting is a lucrative business. As you can see through our job listings, the programming and design sector is heaving with opportunity. If you are willing to take the plunge and go solo, working as an IT contractor could give you financial security and job satisfaction.

If you are considering this career path, you've likely considered different options for working – going freelance, using an umbrella company, or setting up a limited company for contracting. Each method has its merits.

In this post, I'll look at the third option - setting up a limited company. This has various benefits:

  • Greater control of your business activities and finances
  • Limited liability i.e. you are not personally responsible for any financial losses
  • You can fund a pension scheme which can reduce tax
  • Reduced tax expenditure as you pay yourself via dividends
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Considerations before setting up a limited company for contracting

As the owner and creator of a limited company, you have certain responsibilities. You must consider these responsibilities and ensure you understand the requirements fully. Firstly, you must be prepared to put in additional work to create the company. It is a process that requires time and some expense.

Secondly, you must be sure of your business and that it is the career you wish to pursue. Programming and development is an ever-evolving industry – we believe it certainly presents a worthwhile opportunity for a prosperous limited company.

Thirdly, you should be aware of the responsibilities you are obliged to perform as the owner of a limited company.

Your responsibilities as the company owner:

  • Maintain company registration with Companies House
  • Complete and file annual business accounts
  • Complete and submit corporation tax to HMRC
  • Complete and submit VAT returns if applicable
  • Operate PAYE for yourself and any employees

I recommend getting an accountant to manage this process. I personally use Honey Barrett.

Before you start, I also recommend familiarising yourself with IR35.

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How to set up a limited company in the UK and start contracting?

Setting up a limited company for contracting in the UK involves a myriad of important steps. There are certain unavoidable processes that you must complete. Without performing these tasks, your contracting business will not be a legally registered entity. It is advisable to complete these steps in numerical order.

1. Register your business with Companies House

Companies House is part of the Department of Business, and is responsible for maintaining a register of limited companies whilst ensuring that limited companies comply with the Companies Act 2006.

To register with Companies House, you must complete several documents, including:

  • Memorandum of Association
  • Articles of Association
  • Annual business accounts

You must also appoint a company director (likely yourself). You can complete these documents yourself using the guides on the Companies House website. You'll probably want to set up your company by shares.

2. Create a company bank account for your registered business

Most banks offer dedicated business accounts. I personally use Monzo Business, as I like to keep my business finances close to my personal finances.

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3. Register for VAT if necessary

If your revenue is going to exceed £85,000 per annum, registering for and charging VAT is a requirement. Currently, the standard VAT rate is 20%. For example, if you charged a client for a job at £300, VAT would be £60. This means that the client would pay a total of £360.

Once charged to the customer, you have to pass the VAT on to HMRC. Any business expenses you have which included VAT can have their VAT deducted from this payment, which is great if you're making expensive equipment purchases.

4. Register with PAYE

Although most contractors predominately pay themselves with dividends, they normally take advantage of the tax-free salary allowance as well. This requires registering for PAYE, even if you're not going to pay any tax.

5. Obtain insurance

As a limited contracting company, you may be liable for charges and claims from your customers if things go really wrong, so it's necessary to have insurance. Many customers will even demand it.

You'll likely want PI (Professional Indemnity) and PL (Public Liability) insurance. Some people also like to get IR35 and jury insurance.

I recommend using Qdos contractor for insurance as they offer some of the cheapest rates.

6. Maintain invoices and records of business

Nearly done! Going forwards, keep a record of:

  • Business expenses (these can often be claimed back)
  • Customer orders & job details
  • Customer invoices and payment transactions
  • Supplier invoices and payment transactions
  • Any other financial transactions relating to your business

To help organise accounts, books and records, consider making use of software like FreeAgent or Xero.

You can also use Expensify to keep a record of digital receipts.

7. Ensure all taxes and documents are submitted to HMRC

Now you should be trading. You'll now need to submit documents to HMRC at regular intervals:

  • Annual accounts
  • VAT Return (Every 3 months)
  • Company Tax Return (Annual)

If you're paying yourself with dividends, you'll also need to submit a Self Assessment declaring these. A good accountant will be able to handle both your company and personal tax returns.

To propel your contracting business to the next level, creating a registered company is a fantastic idea. With a legal business framework in place, you could even look at expansion. Taking on additional contractors to work in your team would be relatively easy due to registration with PAYE. By doing so, you will open up many new avenues of business and greatly reduce your tax expense. And if you are looking for more outside IR35 contracts and want to get better rates look no further than marketplace.