The Advantages of Forming A Limited Company
As a freelancer, the idea of forming a limited company may seem like overkill. You’re just a one person operation working out of your bedroom. Why on earth would you need to make your accounting more complicated and go down the route of creating a full on company? To many it may seem like an unnecessary burden to bring on themselves, but in fact, forming a company has some very convincing benefits.
The first, and probably most attractive reason, is money. By being a director of a Limited Company, you can take advantage of UK law to pay less tax on your earnings. To be clear, it’s not illegal or dodgy, so there’s no chance of you ending up like Jimmy Carr.
Here’s how it works. Rather than just paying yourself a yearly wage of what you can afford, you pay yourself the minimum wage. This is in order to bring down the amount of income tax you pay as a large amount of that salary will be soaked up by the personal allowance. To top up your income, you then pay yourself in dividends which are taxed at a lower rate.
How much could this save you then? Well, if you had an income of £45,000 a year, you could make tax savings of of just under £2,000 a year. That’s an amount not to be sniffed at. This process isn’t worth it for everyone, in particular for those who are low earners. We at Crunch have a handy take home pay calculator you can use to work out your exact savings.
A completely valid argument against this is that forming and running a limited company is a bit more complicated than staying put as a sole trader. You could learn how to do it all yourself, but what if you haven’t got the time? Well, with the savings you’re making, you shouldn’t have a problem hiring your own accountant to take care of things for you.
Aside from the extra money, there’s another great benefit. While the nature of your business hasn’t changed, the image of your now company has. As unfair as it is, a company has more gravitas to potential clients than a lone freelancer does. Plenty of people who aren’t in the know equate freelancers to semi-amateurs sitting around in the boxers all day eating instant noodles. Of course, we all know freelancers are in fact professionals sitting around in their boxers all day eating instant noodles.
When a client gets a pitch from a company they instantly picture an office, professionalism and experience. It’s not right in the slightest, but it’s an unfortunate truth in many cases. Forming a company means you’re able to portray yourself in a different light that may help you find work.
So, it’s certainly something worth looking into. Times are tight at the moment, so the chance to save yourself some money should never be squandered. Spend a bit of time researching and you might find it could be of great benefit.
Joshua Danton Boyd is an in house copywriter for the online accountants Crunch.