If you are a freelancer, then how you choose to work can have a big impact on your professional life and your take-home pay. Because of this, many freelancers choose to set up a limited company for their professional dealings, taking advantage of the many benefits on offer in the process.
The most popular reason why people choose to set up a limited company is to pay the tax on their wages in the most efficient way possible. As the owner of a limited company, you will be both a director and a shareholder, which allows you to pay yourself through both dividends as well as a salary. This allows you to receive your earnings in a more tax-efficient way as dividends are taxed differently than a salary.
Of course, the benefits of a limited company go far beyond tax alone. While this is one advantage that makes it an attractive prospect for most self-employed workers – allowing them to keep approximately 81%-86% of their profits – there are plenty of other benefits to be gained too.
Read on to find out why you should set up your own limited company if you are working for yourself, and benefits that await you if you choose to do so.
Limited Liability
Limited liability is yet another advantage of setting up a limited company. From a legal standing, when you operate as a limited company you and your business are seen as legally distinct and separate entities. This means that the company has its own bank account where all contracts are paid into and all expenses are paid out of. This means that should your business go bust or make a financial loss, the company is liable rather than you personally. As a result of this, creditors cannot hold you liable or come after your personal assets, hence the term limited liability.
Tax Efficiency
As the owner of a limited company, you can choose to pay yourself through both dividends and a salary. This allows you to greatly reduce your taxable salary, which means that you get to take home a larger percentage of any contracts you undertake. While setting up a limited company does mean that you will have to pay Corporation Tax, this is negated by the fact you will be liable for far less personal tax than other forms of self-employment, including working as a sole trader. This flexibility in how you choose to pay yourself allows you to run your business in the most profitable way, especially if you have the right specialist accountants on hand.
Legally Viewed as a Separate Entity
We have already touched on the fact that a limited company is recognised by law as a separate entity from the owner of the company and any directors or shareholders. As such, the company retains a bank account of its own, will all company assets being tied solely to the company itself rather than a specific individual. This separation of assets and interests is the reason why, as the owner of a limited company, you have limited financial liability.
Before you can reap these benefits you will, of course, have to first incorporate your company, and enlist the services of a specialist accountant to ensure that your taxes are being handled correctly. After all, the last thing you want when you are working for yourself is to be hit with an unexpected bill.
