The main vehicle that freelancers and contractors use for handling their income is limited companies. The Government and HMRC often refer to them as personal service companies. That’s when it is a one-man, or one-woman, business.
The limited in Limited Companies refers to liability.
Limited Liability for Contractors
If a contractor is self-employed the client could potentially sue them, personally, if negligence of theirs costs the client company money.
However, when using a company, contracts are between the client’s company and the ltd company or between that and the agency’s company.
So, that means that the contractor does not have any personal liability. The liability falls, therefore, on his, or her, company. If a client sues the company for a large amount, it would simply go under taking the liability with it. The contractor would carry none of the liability personally.
Liability Insurance for Contractors
However, the contractor would prefer it not to go under if he, or she, can help it.
That’s why many contractors are purchasing Liability Insurance for their companies.
Indeed some clients insist on contractors having it before hiring them.
Contract Expenses Offset Against Tax
Using the limited company the contractor will be able to offset many expenses against tax, so reducing his, or her, tax bill.
As their office is normally their home, contractors can claim for travel and subsistence when going to their client’s office.
They can claim for stationery that they use and any equipment they have have purchased like a PC, printer or scanner.
Also, they can claim for membership of trade bodies and for any pension contributions they make.
Contractors Keeping More Income
Most contractors, using their own Accountants, can keep around 75% of their income from using a limited company.
That compares with using an umbrella company where they can expect to keep somewhere in the range of 60% to 65%.
However, most contractors don’t make their companies tax efficient enough.
There are specialist companies around who, by using tax efficient methods, to cut the tax that contractors pay, can allow contractors to keep 85%, or more, of their income.
Here are some examples:-