Is setting up a limited company as a freelancer the right move for you?

If you’re enjoying the freedom and flexibility that comes with freelancing, you might be wondering if it’s time to take the next step and set up a limited company.

It’s a big decision, but it could be just what you need to unlock new opportunities and benefits.

Let’s look at some of the reasons this could become the best next step for you.

Tax efficiency

One of the perks of running a limited company is the potential tax savings.

For the 2024/25 tax year, the Corporation Tax rate is set at 19 per cent on profits up to £50,000, compared to the higher personal income tax rates, which can be as high as 45 per cent for additional rate taxpayers on earnings above £125,140.

That’s a big difference that could mean more money in your pocket if you utilise dividends and other tax-efficient profit extraction methods. This is money you can reinvest in your business or use to fund your lifestyle and wealth planning.

Dividends are taxed at a lower rate compared to salaries (basic rate 8.75 per cent), which could mean significant reductions in your tax bill.

Plus, you can experience the benefits of various tax-free allowances and reliefs. For example, you can make use of the annual dividend allowance and claim capital allowances on certain business assets, such as plant and machinery, which will help to offset profits and reduce the amount of Corporation Tax that your organisation pays.

Limited liability

One of the biggest advantages of a limited company is the protection it offers your personal assets.

If the company faces financial difficulties or legal claims, creditors cannot pursue your personal assets to recover the company’s debts in most instances.

This protection is a key reason many entrepreneurs choose to incorporate.

Your company is its own legal entity, separate from you. This means your personal finances are shielded from business-related risks, giving you peace of mind.

Enhance your professional image

Operating as a limited company can help to enhance your professional image.

Clients often perceive them as more established and reliable compared to sole traders, which can be a big boost in competitive industries.

Many larger clients prefer dealing with limited companies over sole traders, so it could open doors to bigger contracts and exciting new opportunities.

Financial flexibility

As a director, you can make tax-efficient pension contributions.

Employer contributions are deductible business expenses, which can reduce your company’s taxable profit while boosting your retirement savings.

Limited companies can claim a wider range of expenses, from travel and office equipment to other necessary costs. If you utilise these reliefs effectively, it can lead to more savings and better cash flow management.

Growth potential

If you’re thinking about business expansion, a limited company structure could simplify the process of attracting investors and raising capital.

With flexible ownership structures, you can bring in partners or investors without affecting your personal liability. This flexibility can be crucial for scaling your business and achieving long-term growth.

Additional considerations

While there are many benefits to setting up a limited company, it’s important to be aware of the potential challenges and downsides.

One significant drawback is the increased administrative burden. You’ll be required to comply with various legal requirements set out by Companies House, including filing annual accounts, tax returns, and maintaining detailed records.

This can be time-consuming and may require professional assistance, adding to your costs.

The cost of incorporation and ongoing compliance can also be a consideration, especially for smaller or newly established businesses.

Speak to an expert

Given the complexities and potential implications of incorporating a limited company, it’s important to seek advice from a qualified accountant.

They can provide tailored guidance to ensure you’re making informed decisions based on your specific circumstances.

Contact us today for expert advice and tailored support in setting up and managing your limited company.