By forming a limited company, you’ll escape the standard PAYE tax burden
You could save some dosh by setting up your own limited company, but will it be worth the hassle?
Most workers in the UK pay tax under the Pay As You Earn (PAYE) scheme. In a nutshell, your employer will deduct tax and National Insurance (NI) from your salary before paying you what’s left, a simple and worry-free approach. If you keep your P45 and P60 forms, issued when you leave a job and at the end of every financial year, you may even be eligible for a partial refund.
However, if you're not planning on taking a full-time job in the UK, you may want to consider forming a limited company.
If you're hoping to work short-term contracts, whether finding the jobs yourself or through agency placements, it may be worth setting up a limited company. It's more hassle, but the financial benefits can be amazing.
The rules governing limited companies and taxation are complex. The Professional Contractors Group publish a guide to freelancing at www.pcg.org.uk, while Inland Revenue offers guidance at www.hmrc.gov.uk.
However, if you are thinking of taking the plunge, seek independent, advice from a financial specialist. In the meantime, here are some pros and cons.
Advantages
Money
Money isn't always the main reason that working visitors to the UK set up limited companies — in most cases, it's the only reason.
By forming a limited company, you’ll escape the standard PAYE tax burden, which can run to as high as 40 per cent for those earning quite a bit of money (see page 34).
Instead, you'll pay tax at far lower rates, and may be eligible to offset some of your expenses (travel tickets, phone bills, even computers) against your earnings to reduce your tax payments further. You may also be able to avoid making NI contributions, another potentially sizeable saving.
Disadvantages
Ineligibility
Not all contractors will be eligible to set up a limited company — it really depends on your choice of career, your employment status, whether you are providing your own equipment and/or tools, how you invoice and so on.
The status of small limited companies has become thornier under the newish IR35 guidelines, aimed directly at counteracting what the Inland Revenue sees as tax avoidance among people who claim to be self-employed but who could be considered an employee.
If you work a set number of hours each week or month for one client, you probably fall within IR35 guidelines, which means you won't be able to invoice through a limited company and should be paid through PAYE.
Worse still, if you claim to be outside IR35 but Inland Revenue then considers you to fall inside them, you may well be hit up for a retroactive bill.
Paperwork and organisation
If you're lousy at maths and/or a little disorganised, you might want to consider sticking to PAYE. You'll need to keep all your financial documents in good order, and you’ll also need to ensure you keep a chunk of money to one side for when your tax payment is due.
Cost
Setting up and running a limited company comes with its own financial complications. Start-up costs can run up to £300, and you'll almost certainly need to employ an accountant to file your accounts at year's end.
