Do limited company contractors pay less tax?

Benefits of working through your own limited company

There are numerous reasons as to why people decide to become self-employed and the limited company route is certainly one of the most tax efficient methods of contracting.

It isn’t for everyone; there are more responsibilities compared to other types of contractors and it usually isn’t the best route if you earn less than £25,000 a year or you’re only looking to contract on a short term basis.

However, you can expect to benefit from:

• Higher rates of pay – contractor’s rates of pay are typically higher compared to their permanent counterparts.
• Business expenses – you can offset the costs of necessary business expenses against your tax liability.
• More freedom and flexibility – you’ll have the freedom to choose your clients and hours.
• Gaining skills and experience – a contractor will face new challenges, as well as experience working in new sectors and environments.

Read our Benefits of Contracting page for more on this.

Do limited company contractors pay less tax?

A limited company contractor doesn’t necessarily pay less tax, but as mentioned previously, it is the most tax efficient way to work as you can expect to generally take home around 75-80% of your earnings.

Limited company contractors will be entitled to more business expenses than other self-employed workers and claiming back on expenses can be used to minimise tax liabilities.

You just need to ensure that these are allowable expenses and are for business purposes only.

Examples include:

• Travel costs – such as fuel, parking, hire charges, train/bus/taxi/airfares and accommodation while away for business reasons.
• Office costs – such as stationery, printer ink/cartridges, postage and phone/mobile/internet bills.
• Clothing expenses – if you require specific protective wear, a uniform or a costume.
• Financial costs – such as hiring an accountant.
• Training courses – but they must be related to your current line of work.
• If you work from home, you may be able to claim a proportion of costs for your heating, electricity, Council tax, mortgage interest/rent and internet/telephone use.

Take a look at our Limited Company Expenses Guide for more information on how business expenses work.

Another way that limited companies can be more tax efficient is with the use of dividends.

Dividends are a way in which you can pay yourself and are a portion of the company’s profits after tax that’s paid to shareholders.

You don’t need to pay National Insurance on them and they have their own tax-free threshold.

To find out more about dividends and how they work, read our Contractor Guide to Dividends page.

We hope you found this page helpful. If you have any further questions, our team of experts are available to answer any queries, so give us a call on 01442 795 100 or email jaime.thorpe@dolanaccountancy.com. Alternatively, contact us via live chat.