Every day I walk past a small shop full of funky shoes…on sale.
Predictably, in the shop’s window a few weeks ago there was a pair of
very cool Campers that my feet suddenly, there and then, needed.
Throughout the week my vain, materialistic mind spun daydreams of me in
winter skirts and patterned tights, all matching those boots. But at
the end of the week, when my pay popped into my bank my daydreams
faltered. Once again, even though those boots were on sale, I still
couldn’t afford them – not that week anyway.

However, it was then that
this article came along, a good excuse as any to find out about how to
set up a limited company, which I had heard could boost my earnings. As
part of the research I phoned nearly every limited company umbrella
organisation in London, my mailbox became packed with brochures and my
phone didn’t stop ringing as various organisations tried to get me on

And I was interested. Really I was, not just for this article, but for
those boots. But this limited company stuff is confusing, there is the
IR35 that everyone seems to be wary of and so many percentages to
figure out that it is difficult to know whether it is all more trouble
than it is worth.

Obviously the easiest way to start would be to ring
one of the many limited company umbrella organisations around, tick and
cross the appropriate boxes on the forms they send and wait for the
next pay packet to be bigger than the last. But for those of us who
like to know what we are getting into when we sign official looking
forms, here are the basics and the benefits to becoming a limited

How it works

In England the average employee under the Pay as You Earn (PAYE)
taxation scheme pays National Insurance and a UK Personal Tax rate of
between 22 – 24%, depending on what they are earning. Under a limited
company structure one who contracts themselves out will instead only
pay company tax at a rate of 19%. As a contractor, expenses like
travel, phone or laptop may also be claimed against the tax. Therefore
as one gets taxed less, they take home more.

Fantastic! Such benefits meant that for a while there many people
simply set themselves up as contractors, stayed working with the same
employer and hey presto, paid a lot less tax.

However, in 2000 the grand savings of limited companies were under
threat. Anti-avoidance legislation for the Inland Revenue was
introduced to reduce the number of employees who were using the limited
company structure to avoid tax and Class 1 National Insurance
contributions. This was it, the big, scary, IR35. Contractors were now
subject to investigations into whether they could be deemed more an
employee rather than a contractor by the Inland Revenue. In theory it
heralded the beginning of investigations into limited companies
everywhere and made their umbrella companies more important than ever

According to 1st Contact Limited Companies consultant, Tony
Walkley, though the IR35 clarified who could and who couldn’t work
through a limited company, it was still a grey area. It also seemed
that in practice, despite restrictions post IR35 there were still
monetary benefits to becoming a limited company.

“It is true that for those caught out by IR35, savings are not as great
as they once were, but anyone working for over £10.00 an hour would
benefit from setting up a limited company through an umbrella
organisation,” Mr Walkley said.

One method is to pay yourself less

“As a limited company you can pay
yourself the minimum wage and the rest in dividends. You then pay
national insurance based on that salary.” Mr Walkley said. Another
umbrella company, No Longer Limited, outlined on its web site that
contractors who were subject to IR35 could still save themselves some
money based on an expenses policy that enables people to claim more
than five per cent of their tax. Obviously though, those contractors
who can prove that they are self employed, so are not caught out about
IR35, gain the greatest benefits, enjoying significant tax savings as
the director of their limited company.

So, what are we all waiting for?

What to do

The first thing to do is to contact an organisation that will offer you
a free assessment of your earnings and an outline of how they will be
affected by setting up a Limited Company.

1st Contact offers a free face to face consultation for contractors who
want to explore their options. Prosperity 4 can send you an information
pack via email and then follow it up with a phone call. Their pack
outlines the benefits for freelancers and options open to contractors.
The Inland Revenue is happy to answer any questions or concerns
individuals may have and there is a comprehensive Question and Answer
section on their web site. Orange Genie is another umbrella company
that offers straightforward advice over the phone and No Longer Limited
tackles the IR35 questions head on via their web site. They are also
happy to answer any queries via email or phone and can send out an
information pack via snail mail.

Okay, so it sounds easy, but I have some advice. I did all this
research, received some forms in the post, chased up important bank
numbers, ticked all the boxes and phoned my recruiter to inform them of
the prospective new arrangements. My recruiter, who I shall not name
because that would be mean, then politely informed me that they did not
employ limited company staff. “All too risky,” she said, “could cause
problems,” she continued. This did not bring me any closer to my boots.

According to Mr Walkley many smaller agencies do like to have all their
staff on the same PAYE system so it is important to check with your
recruiter first, you may save yourself an awful lot of time. As for my
funky boots, well they are now on my feet. I figured that that was what
credit cards were for.

Some good contacts:

1st Contact

3rd Floor
Clydesdale Bank House
33 Regent St
London SW1Y 4ZT
Telephone: 0800 039 3082
Web: http://www.1stcontact.co.uk/live/

1 Kinsbourne Court
Luton Road
Hertfordshire AL5 3BL
Telephone (main): 0800 587 7474
Telephone (customer services): 01582 635711
Web: http://www.prosperity4.com/ir35.asp
Email: queries@prosperity4.com

No Longer Limited
Hertfordshire Business Centre
Alexander Road
St. Albans
Herts. AL2 1JG
Telephone: 0845 226 2260 / 0845 226 2270
Web: http://www.nolongerlimited.com/
Email: info@nolongerlimited.com

IR35 Contract Advice Line
Telephone: 0845 303 3535
Answers general enquiries about the IR35
Web: http://www.inlandrevenue.gov.uk

Orange Genie
Edison Business Centre
52 Edison Road
Bucks HP19 8TE
Telephone: 0845 602 3483
Facsimile: 01296 718 948
Web: http://www.orangegenie.com
Email: info@orangegenie.com