Freelancers' Questions: Should I set up a limited company instead?

Freelancer’s Question:

I have been working as a freelance graphic designer since 2006, when I hired an accountant to help with my accounts and tax return, without too many hiccups. But as a sole trader, I’m now finding that a growing number of prospective clients and recruitment agencies will only work with me if I am a limited company.

Having started a trial with an accounting/tax spreadsheet provider for limited companies, I’m starting to think running a limited company is more straightforward than I thought. My accountant, however, is of a different view and is pleading with me not to become limited.

I am still tempted to ‘go limited’ in light of the extra work it should bring. But am I complicating things for myself by changing to a limited company? And is incorporating my business going to cost me more in the long run?

setting up a limited company

Expert’s Answer:

This is a much-asked question and one we come across quite often as, for whatever reason, more clients and agencies are stipulating they will only work with limited companies.

Sole trader = simplest route to go it alone

When you began freelancing six years ago I imagine you will have set up as a sole trader due to the fact that it is the simplest way to start working for yourself. As you have discovered, with just a little assistance from your accountant, you are able to run your business, keep records and file your personal tax return at year-end.

Switching from sole trader to ‘ltd’

If you do decide to switch to limited company trading then you should consider that there will be more paperwork and administration to take care of, although this does not necessarily have to complicate things for you.

As director of your limited company, some of your responsibilities include preparing and delivering statutory returns to Companies House, on behalf of the company, including the annual return and annual accounts. You are also responsible for ensuring that all taxes are calculated correctly and paid on time. A good accountant will work with you in each of these areas, ensuring you are made aware in advance of the important dates regarding filing and payments, and advising you of the monies you need to set aside throughout the year to meet your tax responsibilities.

How much it costs setting up a limited company

Regarding cost, there will be initial charges to incorporate your company, and due to the increased workload, it is likely that your annual/monthly accountancy charge will be slightly higher. However, any additional cost can often be offset by tax savings, although this will depend on the level of profit your business is making.

Paying tax as a sole trader/limited company

As you know, sole traders pay income tax and NI on all business profits, whereas when operating through a limited company you will likely choose to pay yourself a nominal salary (liable for Income Tax and NI), after which you will pay 20% corporation tax (on profits below £300,000) and any remaining profits can be withdrawn in the form of dividends.

Your accountant’s reluctance…

Not knowing your profit figures, I can only surmise that your current accountant is advising you against a limited company set-up due to the fact that your turnover is low and he/she realises that you will pay more tax (and possibly higher accountancy fees) if you go limited. This is a good sign as it shows he/she has your best interests at heart!

However, you still need to weigh up this potential increase in costs against the potential loss of income if you decide not to go limited. I would suggest a frank discussion with your accountant is required, explaining that you may have no option but to trade through a limited company. Ask for an example of the costs involved and the taxes due which you can compare against your current charges and taxes, which should help you make the decision. Failing this, and depending on the nature of the response you receive, it may be time to talk to a new freelancer accountant!

The expert was Alasdair McGill, managing director of Freelance World, a tax and accountancy specialist for freelancers.

More on forming a company and setting up a company


26th April 2017

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