The case for becoming a limited company contractor

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Is it worth incorporating your own limited company to become a contractor? For now, at least, the answer is (probably) yes.*

A lot will depend on you and how the contract itself fits in with your lifestyle and aspirations:

• the pay, including amount, regularity and transfer method;
• the job/project/role duration and longevity;
• your industry experience;
• where you are or are aiming for in both your career path and domestic life;
• your short-, mid- and long term goals, again both business and personal.

Assuming your answers to all the above lend themselves to it, contracting is rewarding.*

But there is one point in that list that can deter would be independent professionals. That sticking point revolves around where they are in their domestic setting. More to the point, does contracting impede getting finance, in particular, mortgages?

The short answer to that question is: it often does, but needn't. To understand the whys, we first have to find out:

…What is a contractor?

Contractors essentially do the same job as 'permies'. What sets them aside is often simple: their outlook.

They possess inner confidence and self-belief in their skill-set, thus their employability.

They don't see themselves as having to tie into the restrictions of a permanent contract. Instead, they see an opportunity to earn more under their own steam. Limited company payment structures offer that alternative.

Most of the time, that limited company works in the contractor's favour. Their account makes sure it does, but does so in a 100% IR35 compliant manner.

Is incorporating a limited company worth it?

It's still worth doing*, even when you consider that the contractor pays:

• their accountant's fees;
• two types of National Insurance;
• Corporation tax;
• for their own:
  • holiday pay;
  • pension contributions;
  • insurances, including sickness and life insurances.

Limited company contractor status combats those impositions on two main counts:

1. They can earn up to 50% more than a permie doing the same job;
2. Tax works in a different way for limited company entities than it does for payroll employees.*

A client is willing to pay more for a contractor's services because:

• they tend to specialise in niche areas of expertise;
• the project may not call for a permanent engagement, e.g. an IT installation;
• by not having to work out payroll*, contractors use fewer HR resources;
• if either client or contractor has a dispute, there's no commitment beyond the contract.

Those points stand whether contractors work via their limited company or an umbrella company.

Don't confuse contracting with freelancing

Contracting isn't the same as freelancing. Whilst some freelancers use a limited company, most work on a per-task basis. Their income and hours can fluctuate dynamically. Most will work for several clients in a week, often at different rates of pay.

This style of work is more aligned with the traditional sole trader model. Hence, a freelancer is more likely to class themselves as self-employed than contractors.*

*Forecast changes for private sector contractors

In April 2020, we're expecting a sea-change in the world of contracting. We expect HMRC to announce details of new payroll rules for private sector contractors. They will then adhere to similar public sector contractor jurisdiction enforced in 2016.

Rather than the contractor decide if they're on a client's payroll, it will be up to the client to decide. To avoid IR35, most clients will lean towards putting contractors on payroll automatically.

The implications are huge. Industry bodies have held talks with HMRC about the new rules for contractors. From those talks, we believe up to 80% of contractors could choose to go back to being employees. If so, the case for becoming a contractor will have a very different conclusion. We will keep you posted.

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