Guide to Freelancing - PCG

WEIGHING UP THE BENEFITS OF A LIMITED COMPANY
PROS
CONS
Overcomes the hurdle of clients
who won‟t deal with sole traders or
partnerships
Personal assets are protected
against company debts*
You can control how you pay
yourself to ensure tax efficiency
If you are working through a
recruitment agency, the agency or
the client can pay your limited
company gross. A recruitment
agency must pay all others as if
they were employees by applying
PAYE
It‟s easier to set up trade accounts
with suppliers
Owner managers can get Statutory
Sick Pay, Statutory Maternity Pay
and similar benefits**
Entitled to R&D tax credits
There are more rules and regulations
If you get hit with IR35, you get stung
with the bill, not the client
There is more admin due to the legal
reporting requirements and number of
returns that have to be made
Accountancy fees tend to be slightly
higher for a limited company
The penalties for getting it wrong or
submitting returns late are greater
than for sole traders
You can‟t just withdraw money from
the business without formally
recording it as salary, dividend or loan
Your company must pay a 25% tax on
any money you borrow from your
company if you don‟t repay it within
nine months of the year end (this is
repayable after the loan has been
repaid)
Can have occupational pension
scheme and NIC relief for pension
payments
The company has to pay corporation
tax on gains made if you sell company
assets.
A limited company can raise funds
through Venture Capital,
Enterprise Investment Schemes or
sale of equity
* As long as you haven‟t given any personal guarantees or acted negligently
** 10% of Statutory Maternity Pay is paid to small employers, so the owner managed company can claim the cost back from
the Government with a 5% margin. As the cost is borne by the company and then recovered, the margin remains within the
company. Sole traders cannot claim Statutory Maternity Pay but if you are registered self-employed and are paying Class 2
National Insurance Contributions (NICs), you will be eligible for Maternity Allowance (MA) which pays a standard weekly rate of
£128.73 or 90 per cent of your average gross weekly earnings (before tax), whichever is the smaller. MA is paid for a
maximum of 39 weeks. For more information about maternity pay please visit http://www.nidirect.gov.uk/nil-17a.pdf
THE RULES
• The company must have at least one director and a registered office, and must have “Limited”
or “Ltd” after its name.
• Private limited companies are not obliged to appoint a company secretary unless the
company's articles contain a reference to the company having a secretary.
• Ownership in terms of the split of shares in the company is up to you but many freelancers
split the shares with their spouses. HMRC have previously attempted to challenge this type of
set up, in particular, with the infamous Arctic Systems case, which HMRC lost at the House of
Lords. Following the case HMRC proposed a new set of rules to combat what they called
„income shifting‟; however, these have not yet come into force. In general, it is considered
best to make the split when the company is first formed and in the case of a husband and
wife, ensure that the shares subscribed for or provided to the spouse are full ordinary shares.
PCG members can download the guide to Family Business Tax for more information.
Copyright PCG September 2011 Guide to Freelancing Version 7.0 18