close menu

Contracting through UK limited companies

Working through a limited company is a popular choice for UK contractors and freelancers. This can be particularly rewarding for higher income earners and those whose contracts fall outside of IR35.


Unlike self-employment, a business that is incorporated as a limited company is a separate legal entity to its owners (shareholders). One of the biggest advantages of this is that individual shareholders cannot be held personally liable for any company debts. As a separate legal entity, limited companies are also treated differently for tax purposes, a significant benefit for contractors.

Working through a limited company

When you set up a limited company, your agency or client pays into the company’s business bank account. You then use these funds to pay yourself with a combination of salary, expenses and dividends (the best combination can be discussed with an accountant or financial adviser).

As the sole director and shareholder of this company, you may be held responsible for the actions of the company. The onus is on you, as the director, to adhere to all company rules.

When setting up a company, you will be liable to pay various fees. These include set-up fees, accounting and Companies House fees.

1st Contact Accounting can help set up a company and assist with packaged and bespoke accounting services. Don't forget to mention that you use our Kickstart services to get your discount for your company and business bank account set-up.

Salaries and taxation

You can choose to draw a salary from your company, depending on your personal financial circumstances. Your director's salary is still subject to Pay as You Earn (PAYE) tax and National Insurance (NI). Profits for small companies are taxed at a flat rate of 20%, compared to varying rate for employees, which can reach 40%.

The remainder of your income can be drawn as dividends from the company's net profit. Dividends do not attract NI and you only pay personal tax on dividends drawn over and above the upper tax threshold (£42,475).

Furthermore, a company can be a very tax-efficient vehicle through which to make investments (e.g. into an executive pension).

The UK government is working to counter what they see is widespread tax avoidance by contractors. They believe that contractors are using companies to “disguise employment” and pay business levels of tax when they should be taxed as employees.

It is vital for you to seek advice from reputable and regulated accountants to ensure that you stay within the rules and do not become overwhelmed with the potentially costly compliance burden.

Take a look at the limited company section on the 1st Contact Accounting site for more information.

We use cookies so that we can provide the best user experience possible. If you are happy with this, continue to use the site as normal. You can read more about our cookies policy here