What is a Limited Company

A Limited Company is a business that is incorporated with the Companies House. Shares in the company are allocated to individuals or companies who collectively own the Limited Company and the shareholders’ liability is limited by law to the value of the shares.

For most businesses, the limited liability aspect is the most significant for being incorporated and running the business through a Limited Company.

For contractors, however, the most significant aspect is the fact that the Limited Company is considered a legal entity (think of it as another person) that is allowed different tax treatment.

In particular, retained earnings/distributable profits can be paid as dividends that are not taxed PAYE and NI on distribution in the same way that salaries are taxed.

Tax paid on salaries can be as high as 40% PAYE and 12.8% Employers NI and 1% Employees NI, a total of 53.8%, if you are a higher rate tax payer.

The reason for this different treatment for a Limited Company is because the dividends have already been taxed under the corporation tax regime, which is a much lower tax rate of 21%.

Being a contractor in the UK allows you the opportunity to open a Limited Company, whereby you are the Director and you manage and run the company yourself.  The benefit of being the Director of a Limited Company allows you the possibility of benefitting from corporation tax regulations.