Minimal annual income for limited company setup

[WhiteRoses]

Hi everyone.

I'm new to the forums and new to contracting, and am looking forward
to the independence it has to offer.

Having spent considerable time reading as much as I can here on the
forums (as well as using the 'first
timers' link on the right of the page) I am confident that operating as
a limited company is the best option for me.

However, one issue I have which I can't seem to find much information
about regards the minimum worthwhile income for operating as a
limited company.

Since I am just starting out at a junior level, I predict a total of around
£30,000 going into the company in the first year (i.e. working around
46 weeks a year on a day rate of £130). My predications are made
around this rate as I want to calculate a worst-case scenario (it's likely
I'll make a little more).

My question is perhaps very simple – is it worth running a limited
company when dealing with that kind of money, or should I just go
self-employed? My expenses will mainly be travel, subsistence, and
accountancy fees, and I don't mind dealing with the administration
required to run the limited company.

Below are my calculations. I would be grateful if anyone here with
more experience could let me know their thoughts, and whether or not
these are accurate (I am only applying the 20% corporation tax to
profits minus my base salary and predicted expenses; I believe this is
correct):


As self-employed:

Predicted freelance income of £30,000
(20% income tax bracket)
Personal tax-free allowance: £9,440

30,000 – 9,440 personal tax-free allowance = 20,560
20% of 20,560 = 4,112

30,000 (total salary) –
4,112 (income tax) =
£25,888


As limited company:

30,000 – 9,440 tax free base salary = 20,560
20,560 – 6,000 (predicted tax-relievable expenses) = 14,560

14,560 profit
14,560 – 20% corporation tax = 11,648

9,440 (tax free wage) +
6,000 (tax-relievable expenses) +
11,648 (net profit taken as dividend) =
£27,088



Given the above, it would make sense to operate as a limited
company, assuming my calculations are correct, as I would make
around £1000 more in the year. Does this appear correct? Any advice
would be much appreciated.

[socialworker]

I think you will find you cannot go self employed with an agency. It's either PAYE (direct or though umbrella) or Limited. If you have contacts and can go direct that is another matter of course.

I went limited on a lowish income, it is barely worth it really, I just wanted the experience. The only advantages are flat rate VAT and home to temporary workplace mileage UNLESS you are within IR35 and can then do the dividend thing, then you need to factor in insurance, contract reviews. I dont personally think it is really worth it unless you are earning considerably more. Another advantage of your own limited though, is if you change assignments often you dont have to deal with agencies trying to insist you have change to their umbrella.

Against limited, you still have to keep an eye on your accountant as it is you who is responsible for making sure things are done properly, mine has made several mistakes. A good umbrella means no hassle and peace of mind, I used Contractor Umbrella. I think it is only worth setting up limited if you are sure you are going to contract for at least a couple of years and you are sure you will be outside IR35; Limited co's are not something you want to be setting up and shutting down all the time, that isn't what they are designed for.

[JPennW]

This is very helpful, thanks. I'm in a similar position to the Op and am about to set up MyCo, appoint the accountant etc.
I think Ltd is worth it for me, just waiting for the contract to come through.

[northernladuk]

It's about 30k or £12-£15 an hour. One of the threads is here...

http://forums.contractoruk.com/accou...rella-ltd.html

Couple of threads discuss the umbrella v LTD at these values in the search below. Need to dig a bit through..

https://www.google.co.uk/search?q=30...ntractoruk.com

EDIT : Don't want to be the harbinger of doom but just like to point out...

Since I am just starting out at a junior level, I predict a total of around
£30,000 going into the company in the first year (i.e. working around
46 weeks a year on a day rate of £130). My predications are made
around this rate as I want to calculate a worst-case scenario (it's likely
I'll make a little more).

46 weeks isn't a bad value to use on a normal year and is most certainly NOT a worst case scenario, particularly if you end up have a number of very short contracts in a year. As a first time contractor I would bank of 30-36 weeks work tops if you are looking at worst case. If you have 4 weeks hols that only leaves 4 weeks out of contract all year with 46 weeks.

Good thread here explaining about self employed not being an option and what else is available... Also mentions the 30k limit.

http://forums.contractoruk.com/accou...-employed.html

The legalities of it are something to do with the following comment..

ITEPA 2003 Chapter 7 says otherwise - in simple terms it requires agencies to pay their "workers" as employees - so that means the worker using their own limited company, an umbrella, or a direct employee of the agency.

Virtually any other business model does have the choice of employee or self employed depending on the "badges of trade", but specific legislation has been enacted to stop agencies paying their workers on a self employed basis.

[Wanderer]

Have you factored in that a LTD company will cost £1,500 to £2,000 per year to cover accountancy insurance?

Also consider registering for VAT and joining the Flat Rate Scheme.

[DirtyDog]

I went limited on a lowish income, it is barely worth it really, I just wanted the experience. The only advantages are flat rate VAT and home to temporary workplace mileage UNLESS you are within IR35 and can then do the dividend thing, then you need to factor in insurance, contract reviews.

NO - you do the "dividend thing" if you are OUTSIDE IR35.

Against limited, you still have to keep an eye on your accountant as it is you who is responsible for making sure things are done properly, mine has made several mistakes. A good umbrella means no hassle and peace of mind, I used Contractor Umbrella.

Regardless of how good they seem, there is still an additional person who can disappear with your money - can't remember who it was, but there was someone here who had two umbrella companies go bust on them.

Plus (as you say earlier), going umbrella means that you may find that agencies refuse to deal with the one that you chose.

[socialworker]

NO - you do the "dividend thing" if you are OUTSIDE IR35.


Regardless of how good they seem, there is still an additional person who can disappear with your money - can't remember who it was, but there was someone here who had two umbrella companies go bust on them.

Plus (as you say earlier), going umbrella means that you may find that agencies refuse to deal with the one that you chose.

Oops yes I meant outside . Well spotted.

On the second point, if an agency has you all set to start a commission paying gig surely they will sign up to your umbrella rather than lose their profit?

[DirtyDog]

On the second point, if an agency has you all set to start a commission paying gig surely they will sign up to your umbrella rather than lose their profit?

You would think so, but there are stories on here of people where the agency has told them to change umbrella to one of their choosing or incorporate as a Ltd.

Can't see why the agency would force the issue (apart from a brown envelope), but apparently they do.

[SueEllen]

Can't see why the agency would force the issue (apart from a brown envelope), but apparently they do.

Agencies have thick staff so the easiest way of ensuring you are compliant and they won't get chased for taxes you haven't paid is by either making you work through a limited company, or an umbrella company their management has approved.

[WhiteRoses]

Thanks for the feedback everyone. I hadn't factored in accountancy insurance – only accountancy fees.