One of the big advantages of 'going limited' as a contractor is the flexibility you gain over your earnings, which can help you be much more tax efficient. When you work for an umbrella company or as a self-employed contractor, you pay tax on everything you earn, at the time you earn it. As a limited company contractor, you have greater control. So for example if you're saving for a career break, and your extra efforts take your income above the basic rate tax threshold of circa. £39k and into a higher rate tax bracket, you simply leave the extra money in the business bank account until you're not working, draw it then, and pay the equivalent of the basic rate on the whole amount.
So, what could you do with that cash you leave in your company?
Save up for something special. Several of our clients have worked hard, saved up some surplus profits then gone travelling around the World. While you are travelling, you can continue to draw earnings even though you are no longer contracting.
Have you ever thought about what it would be like if your contract was cancelled at short notice? Or your hours were cut?
By leaving money in the company, it means that on those odd months where maybe you have not quite earned enough money to cover your bills you can top up what you pay yourself.
Or if your contract is cancelled and you have one due to start in a month or two if you have the funds in the account you can use this to continue to take consistent earnings.
The main point here is that we don’t know what is around the corner, and if for whatever reason you couldn't work, having money in the business could be your lifeline.
Take a Break
Or how about a career break? A common example is if you stop contracting to have a child. Again you could continue to draw consistent earnings while you spend time out of contracting. If planned correctly, this would see you through to when you eventually look to return to contracting.
As a shareholder and employee of your limited company, you work hard, and this flexibility with earnings is one of the rewards. You’re the boss, take control and if you plan when you take your earnings, it could quite literally change your life.