Expenses Guide – Limited Company

We have detailed some of the expenses more likely to be incurred in running the business by you, the director and any employees. Allowable expenses must genuinely be incurred  “wholly and exclusively” for the purpose of the business. However, there are examples where the non-business purpose element is merely incidental to the business purpose and the expense will still be allowable.

What expenses are allowable against the turnover of your business and what expenses can be reimbursed to you by the Company can be complex and confusing and it is important to ensure that the Company complies with the relevant tax and Social Security legislation. If any expenditure has a “dual purpose” then this expenditure will generally not be claimable. By way of an example, the cost of items of clothing that are not provided under Health & Safety or are not a recognisable uniform with a permanent and visible logo are not allowable.

All expenses must be the actual expenditure incurred and not rounded or estimated sums. Receipts for all expenditure must be retained for a recommended period of six years as HM Revenue & Customs (HMRC) may ask to see these. Please take a few minutes to read through this guide and check that any expenses claimed are allowable.

Bank Charges

Bank charges paid by the Company are allowable.

Car Purchase

You may be considering the purchase of a new car and are wondering whether this should be done privately or through the Company.

In general it is true to say that the most cost effective way is for you to purchase the car is privately. You can then charge the Company the tax free mileage allowance (45p up to 10,000 miles/25p thereafter). However if you wish to purchase the car through the Company you should be aware that as a director and 100% shareholder effectively you are financing the cost of the car yourself. In addition, as a director a car made available to you for private use by your employer will attract a Car Benefit in kind charge. If the Company pays for any private fuel (even for just one mile of private mileage) you will also incur a Car Fuel Benefit in kind charge.

The Car Benefit charge is based on the percentage of the car’s original list price and the carbon dioxide (CO2 emissions) up to a maximum of 37%. The Car Fuel Benefit is calculated on the relevant percentage of CO2 emissions on a flat rate figure, £24,100 (6 April 2019 to 5 April 2020).

If a Car Benefit (and Car Fuel Benefit) charge arises it will be necessary to prepare and submit a form P11D to HM Revenue & Customs by 6 July each year. The Company are required to provide details of the vehicle and calculate the relevant benefit in kind charges. The benefits would then be shown on your Self Assessment Tax Return.

In addition to the tax due on the benefit charge(s) Class 1A National Insurance Contributions (NIC) is due. This liability to NIC arises on the Company (not the director).

Class 1A NIC is currently charged at 13.8%.

As you will appreciate the liabilities to tax and NIC on you the director and company can be significant and you should be sure of the full implications of purchasing a vehicle through your company. Please contact us if you intend to do so.

Child care

Tax-free Childcare was introduced in October 2018 and does not rely on employers offering a child care scheme. This is a Government run scheme available to parents of up to £500 every three months (£2,000 per annum) for each child. If eligible the Government will pay £2 for every £8 paid to childcare provided via online accounts. Childcare vouchers and directly contracted childcare is closed to new applicants; however if you joined prior to 4 October 2018 you might qualify to keep getting vouchers and contracted childcare.

You cannot claim childcare vouchers or directly contracted childcare if you successfully apply for Tax-free Childcare.

See link: https://www.gov.uk/help-with-childcare-costs/childcare-vouchers

For rules relating to existing childcare vouchers schemes, child care costs of (currently) £55 a week (or £243 a month) can be claimed as a fully deductible company expense if qualifying conditions are met.

Qualifying Conditions:

• Your company can only use the childcare vouchers to pay for childcare that has been registered or approved
• The child is:
– a child or stepchild of the employee at whose expense, either in full or in part, the child is maintained; or
– resident with the employee and for whom the employee has parental responsibility;
– qualifies up to 1 September after their 15th birthday (or 1st September after their 16th birthday if they are disabled)
• Your childcare voucher scheme is generally available to all of your employees where the scheme operates.

The £55 a week (or £243 per month) exemption applies to each individual employee, not per household or number of children. If the qualifying childcare support costs exceed £55 a week, the excess will need to be paid for personally.

The current scheme remained open to new entrants until October 2018. Parents already registered by this date can continue using it for as long as their employer offers it.

What counts as registered or approved childcare?

Registered and approved childcare includes:

• Registered child-minders, nurseries and play schemes
• Out-of-hours clubs on school premises run by a school or local authority
• Childcare schemes run by approved providers, for example, an out-of-school hours scheme or a provider approved under a Ministry of Defence accreditation scheme
• Childcare given in the child’s home that has been approved under a Government scheme (except where the care is provided by a relative of the child)
• Accredited childcare for 8s and over by an approved organization.

Please note that the childcare must be ‘qualifying childcare.’ It will not cover the payments made to unregistered child minders/nannies or relatives such as grandparents who look after the children. Neither will this cover payments of school fees.

What records does your limited company need to keep?

You will need to keep records that the qualifying conditions have been met. These records should include:

• Evidence that the scheme is offered to all staff where appropriate
• Details of the child using the childcare, for example their name and date of birth;
• Details of the child carer(s) used including their registration or approval numbers and, if appropriate, when their approval expires; and
• Evidence that your employees participating in childcare voucher schemes are required to inform you of any changes in the registration or approval status or their child carer;

Please contact us for further details on how existing childcare schemes operate and how to claim these expenses.

Car Rental

Reasonable car rental costs are allowable where a hire car is used for business journeys only. Where the hire period is extended the cost of hire for periods when the vehicle is no longer used on business should not be claimed. A comprehensive mileage log should be kept to demonstrate that the vehicle has been used for business journeys only.

Company Credit Cards

Credit cards in the Company’s name can be provided to authorised users for business use only. If  used inadvertently to make a purchase for a personal item reimbursement must be made in full before the settlement date.

Computer Equipment (Hardware and Software)

Computer equipment, includes laptops, desk top computers, scanner machines etc. Such equipment can be provided by the Company for business use only at your home. Any private use should be incidental and “not significant.” If the Company operates the VAT Flat Rate Scheme, VAT can only be reclaimed if total costs in excess of £2000.00.

Whilst the Company can provide computer equipment to a director, and subject to the above conditions no benefit in kind should arise. However, if the director purchases the computer equipment and claims reimbursement for this from the company the reimbursements is not an allowable cost.


  Business Entertaining

Business entertaining does not include entertaining employees of the same organisation, personal friends, or business acquaintances where there is no business obligation to entertain them. Business entertaining costs are not an allowable expense for the Company. Reimbursements of expenses incurred by you in genuine business entertaining of customers/clients can be claimed but any such costs will be disregarded when calculating the Company taxable profits.

Details of the names of attendees, the organisation which they represent, the purpose of the entertainment and the venue at which the entertaining took place should be kept, together with full  supporting receipts.

  Staff Entertaining

Staff entertainment is the provision of entertainment (including hospitality of any kind) for employees where its provision for them is not incidental to its provision for others. Examples include  the cost of meals where only employees are present, hotel accommodation, theatre outings and attending restaurants, hotels, sporting events etc where no customers or business contacts attend.  The provision or reimbursement of  staff entertaining is an allowable expense for the Company but you will have a tax and potentially a NIC liability.

A liability to tax and NIC will not arise on the provision of an annual party, usually at Christmas/summer time. Additional events may also be held. Subject to the total costs not exceeding (currently) £150.00 per head you will not be taxed upon it providing the total cost does not exceed the exemption. If cost is just £1 over then the whole cost will be subject to tax and NIC. The event must be open to all staff, although in reality that will just be you! You may invite a partner, but if partners are invited, all staff must be entitled to invite a partner and partners will count for the £150.00 per head exemption.

From 6 April 2016 “trivial benefits” are exempt from tax and NIC subject to the following conditions being satisfied:

  • the cost of providing the benefit does not exceed [insert short code]
  • the benefit is not cash or a cash voucher
  • no entitlement to the benefit under the employment conditions
  • the benefit is not provided in recognition (or anticipation) of services or duties performed.

For close companies the total amount that can be treated as a trivial benefit is capped at £300 in relation to benefits provided to directors or other office holders of the company, or to a member of their family or household.

Gym, health club and sports facilities

Gym, health club and sports facilities provided by an employer will not give rise to a benefit in kind charge so long as the following conditions are satisfied:

  • The facilities are provided for use by all employees
  • They are not open to the general public
  • They are used wholly or mainly by employees

If the Company meets the cost of membership to a gym, health/sports club on behalf of you the employee/director and the Company contracts directly with the gym/sports/health club a benefit in kind will arise based on the cost of the membership. It will be necessary to prepare and submit a form P11D to HM Revenue & Customs by 6 July each year. This benefit would then need to be shown on your Self-Assessment Tax Return.

In addition to the tax due on the benefit charge Class 1A National Insurance Contributions (NIC) are due. The liability to NIC arises on the Company (not the director). Class 1A NIC is currently charged at 13.8%.

If you claim reimbursement for your own membership costs (ie you contract directly with the gym/sports/health club) the reimbursement is a taxable expense and must be reimbursed through the payroll with tax and Class 1 NIC deducted.

As you will appreciate the liabilities to tax and NIC on you the director and the Company can be significant and you should be sure of the full implications of sports/health club memberships being paid on your behalf or claimed back from the Company. Please contact us if you are considering this.

Home Telephone

The costs for all business calls made from your own home telephone are allowable. However, no element of the telephone line rental charge is allowable. All claims must be supported by an itemised bill with the relevant numbers highlighted and details of the name of the customer/client and the purpose of the call.

The Company can arrange for a dedicated business line to be installed at your home and so long as this line is used for business purposes only, all costs, including line rental are allowable.

Home expenses/Use of home as office

You may claim for additional costs for working from your home. If a reasonable proportion of the fee earning work is done from home a proportion of certain costs can be claimed, based on the number of rooms (excluding the bathroom(s) and kitchen) and a percentage of the time the room or area is available for business use. This includes additional lighting and heating costs, telephone calls and any dedicated business broadband service. All such claims would need to be supported by receipts.

Unlike for sole traders no proportion of rent, mortgage interest, council tax, water rates etc costs can be claimed by a director.

Alternatively a flat rate, currently £4 per week (£18 for monthly paid) can be claimed. This is a less onerous way to claim relief as you are not required to keep any records. In many cases such amounts may be sufficient to cover additional costs for heating and lighting the work area.

Internet Subscription

The Company can arrange for Internet access to be installed at your home to be used for business purposes only. This is only where broadband has not hitherto been installed. The contract must be between the Company and the service provider and paid from the Company bank account. No liability to tax will arise so long as any private use of the Internet access is “not significant.”

Any amounts reimbursed to you for subscriptions paid by you personally to the service provider are not allowable.

Insurance – Employer’s Liability, Public Liability and Professional Indemnity Insurance

By law all employers must have Employer’s Liability Insurance to cover against claims by employees for injury etc. However if the Company only employs the owner and they own at least 50% of the shares this is not necessary. Public Liability Insurance is to insure against claims from third parties that may sue if they have suffered from the Company’s or their employees  actions. You will note on the IMS website we state this but it is usual for an Agency/client to require cover and provide proof of cover before allowing an individual on site. Professional Indemnity Insurance is to insure against any claims made against the Company, for example, software produced by the Company that does not work.

Legal, Accountancy and Professional Costs

Legal, Accountancy and Professional costs paid by the Company for Company matters are allowable. Any costs relating to personal advice, ie completion of  Self Assessment Tax Return are not allowable and if paid by the Company you will have a tax and NIC liability.

Medical, Dental and Permanent Health Insurance

Your Company can arrange Medical and Dental Insurance cover for you, your family and any employees. The policy should be taken out in the Company’s name. The Company can claim relief in respect of premiums paid each year.

Medical and Dental Insurance cover provided by your Company will give rise to a benefit in kind and will need to be returned on Form P11D each year. The Company will be liable to Class 1A National Insurance Contributions (currently at 13.8%) on the premiums paid. Tax will be due in respect of the benefit through your/the employee’s Self-Assessment Tax Return.

With effect from 6 April 2016 it is possible to include medical benefits in the payroll removing the need to return details on Forms P11D. To do so an employer must register this intention with HMRC by 5 April in the year preceding the year in which benefits are to be included in the payroll.

The Company may also wish to consider Permanent Health Insurance (PHI). PHI will provide cover to protect the business in the event of you and your employees becoming unable to work through illness. The policy should be taken out in the Company’s name. The Company can claim relief in respect of premiums paid each year.

So long as the insurance cover is correctly arranged and available for all employees and directors no benefit in kind should arise for the employees/directors.

Miscellaneous Expenses

Miscellaneous costs paid by the Company that are allowable, including office supplies, postage, stationery and computer consumables  costs, etc.

Mobile Telephone Costs

The costs for all business calls made from your own mobile telephone/Smartphone are allowable. However, no element of the telephone rental charge is allowable. All claims must be supported by an itemised bill with the relevant numbers highlighted and details of the name of the customer/client and the purpose of the call.

The Company can provide a mobile telephone/Smartphone to you. This must be restricted to one per household in order to avoid a benefit in kind. The contract must be between the Company and the service provider and paid from the Company bank account.

Pension Contributions

Contributions to a Company Pension Scheme can be tax and NIC efficient as any contribution to a pension scheme is outside the scope of NIC. We recommend that specific advice should be sought regarding pension contributions.

Premises Costs

If the Company has premises other than your home the costs of running these premises, such as rental, business tax, utility costs etc are allowable.

Professional Subscriptions

Subscriptions paid to professional bodies, or learned societies, for the better performance of your and your staff’s duties of employment are allowable so long as the body/society is recognised and approved by HMRC and included on their published List 3.

Publications, Technical Journals and Magazines

Publications, trade journals and magazines subscribed for by the Company for the director/employee to carry out their duties of employment are allowable. The purchase must be made from the Company’s bank account and any subscription must be in the Company’s name.

Relocation Expenses

Eligible relocation expenses are allowable. A qualifying relocation includes, on commencement of a new employment, where there is a change in the employment duties or a change to where the duties are normally carried out. The expenses must be incurred before the last day of the tax year following that in which the relocation has occurred.

Qualifying expenses include, expenses of acquisition and disposal (legal,estate agent and surveyor fees), expenses of transporting belongings, travel and subsistence, duplicate expenses (new for old items) and bridging loan expenses. A maximum of £8,000.00 of ‘qualifying expenses’ can be paid free of tax and NIC. All expense must be supported by receipts.

Salaries/Staff wages and Employer’s National Insurance Contributions

Salaries paid to you and staff (where you are a fee earner) are allowable. Employer’s National Insurance Contributions paid by the Company are also allowable.


Subsistence expenses, when you and/or staff are required to travel away from your normal place of employment whilst on business are allowable. The general rule is if travel costs (see below) qualify as business travel any associated subsistence costs are also allowable. Meals and refreshments when you/staff are working away from home must be reasonable. The cost of a sandwich etc purchased on the way to a temporary workplace can be claimed but not for food prepared at home.

Accommodation costs when you/staff are required to stay away from home whilst on business are also allowable. Accommodation includes hotel, guest house, Bed & Breakfast or staying with friends and in certain cases furnished accommodation. This includes rented apartments/flats/houses or flat-share where this is a cheaper and  more convenient alternative to hotel accommodation. Where the cost for rented accommodation is claimed we would need to see a copy of the Tenancy Agreement. Costs of accommodation should be appropriate to the business need, reasonable and not excessive. The cost of breakfast and an evening meal is also allowable.

Receipts must be obtained and only actual amounts expended should be reimbursed.

In addition, where you/staff stay away from your normal place of employment and you may incur additional “overnight incidental expenses.” Such expenses will be incurred when staying in a hotel/guesthouse and includes telephone calls home, laundry, newspaper, mini bar etc. Amounts of up to £5.00 per night for stays in the UK and up to £10.00 for each night, any part of which is spent outside the UK, are allowable and can be paid without receipts.

Sundry Expenses

Sundry expenses incurred, such as office supplies, postage, stationery etc are allowable.

Travel Expenses

All travel expenses for business journeys by any mode of travel are allowable. Business journeys are journeys necessarily incurred in the performance of your duties or travelling to the job where the workplace is classed as “temporary”. Travel to and from a temporary workplace is allowable if the period of time to be spent there is expected to be less than a maximum of 24 months and does not actually exceed 24 months. If initially the period of time is expected to be up to 24 months and the contract is extended beyond that period no further travel expenses are allowable as that workplace immediately becomes a permanent workplace .

All claims must be supported by the relevant ticket/receipt.

This does not include journeys that are ordinary commuting or private travel. Expenses incurred in respect of ordinary commuting or private travel is not allowable under normal circumstances. Any non-business travel reimbursed by the Company would have to be paid through the payroll with tax and NIC deducted. Any costs met directly by the Company for non-business travel is a benefit in kind and would have to be returned on form P11D.

Any non-business travel reimbursed by the Company should be paid through the payroll with tax and NIC deducted. Any costs met direct by the Company for non-business travel is a benefit in kind. You will have a tax liability  and the Company would pay Class 1A NIC (currently 13.8%) on the cost.

If your/staff spouse/partner accompanies you/staff to business functions and incurs travel costs these may be allowable but they must have some essential practical purpose. Further advice should be sought in respect of any travel (and subsistence) costs incurred by a spouse/partner.

Where you use your own car, motorcycle or bicycle on business journeys, mileage allowances can be paid in accordance with the rates below. You/staff must ensure that you have adequate insurance cover for business use and that the car is in roadworthy condition.

A comprehensive mileage log should be kept and produced, together with each claim.

The current rates apply:

Motor – 45 pence per mile for the first 10,000 business miles travelled and 25 pence thereafter.

Motorcycle – 24 pence for each business mile travelled.

Bicycle – 20 pence for each business mile travelled.

Passenger allowance – If you/staff carry colleagues in the car on business journeys an additional 5 pence per mile can be claimed.

Expenses for car parking, toll charges and congestion charges incurred whilst on business journeys are allowable. Parking fines or congestion charge penalties or any other traffic violations charges or penalties are not allowable.

How the ’24 month’ and ‘40%’ rules apply to a director’s travel claims

Claiming travel to a ‘’temporary workplace’’ as an ‘’allowable’’ expense is subject to the “24 Month Rule”.

‘’24 Month Rule’’: HMRC specifies that travel to and from an assignment site is an “allowable” expense if the period of time at the site is both  expected to be less than a maximum of 24 months,  including any time spent on-site prior to the current contract and in fact does not exceed 24 months.  If, at any time, the contract is extended or is expected to be extended beyond 24 months, no further travel to and from the site is allowable as the work place would be deemed to be permanent.

One exception to the above principle may arise where you spend 40% or less of your time at a workplace.  If this is the case, all expenses incurred in travelling to and from that site are ‘’allowable’’ regardless of the  24 month rule, provided that the site is a ‘’temporary workplace’’.  The claim may continue indefinitely for as long as circumstances continue to satisfy the 40% rule.

In addition, travel expenses incurred visiting sites which are not your main assignment site will be ‘’allowable’’ provided that you spend less than 40% of his time at that site.

An example:

You have been working at a site for an 18 month period. This was the period of time for which you had expected to work at this site. You finish working at this site for three months but then return to the site for a further six months. You will therefore be working at the contract site for a total of 24 months (18 + 6). In this case, you would be entitled to relief for your travel between your place of business and the site during the first 18 months because you did not expect to be at the contract site for more than 24 months. You would not, however, be entitled to relief for your travel expenses between your place of business and the client’s site for the further six months (because you did not expect to be at the contract site for less than 24 months).

There is no specific guidance in the legislation or case law as to what exactly constitutes a “significant break” to reset the 24 months. If you have no choice but to return to the same site then the facts of each circumstance would need to be considered.

In order for the 24 month clock to reset to zero, your new site must be a “significantly different” to your previous (assignment or employment) site.

There are several factors that must are considered to determine if your site is ‘’substantially different’’ from your previous site.

These include the ‘’route’’, ‘’cost’’ and ‘’time’’ of the journey, as well as the ‘’distance’’ away (must be at least 10 miles apart) from your previous site (irrespective of whether there has been a change in your contract(s), employer(s), Agent(s) or Umbrella provider etc.).

HMRC guidance and further examples can be found by clicking on the following link: http://www.hmrc.gov.uk/manuals/eimanual/EIM32080.htm

In order to make an assessment of whether your travel is an ‘’allowable’’ you should consider the following questions:

  • Do you spend 40% or more of your time at the workplace? (If yes, then you must check whether it is a ‘’temporary workplace’’ in order to be eligible to claim travel expenses)
  • Does your workplace meet the ‘’24 Month Rule’’ requirements in order to qualify for ‘’allowable’’ expenses?
  • Have you worked at the workplace before?
  • Have you considered your previous workplace?

In the case of Umbrella workers, the ability to claim travel expenses is based on them working under a genuine over-arching contract of employment with the intention to work on multiple assignments and therefore workplaces linked together under that one employment contract. If the Umbrella worker does not intend to work on future assignments at different sites under the same employment contract (with the Umbrella provider), then their initial workplace can’t be deemed to be ‘’temporary workplace’’ for travel expense claim purposes.

Travel for Non-domiciled Individuals

You may qualify for certain additional travel expenses under the rules for non domiciled individuals. Whether such travel is allowable is subject to meeting certain conditions. These conditions are quite technical but include the length of time you have spent in the UK and the requirement that you are a non-UK domiciled individual.  If the conditions are satisfied expenses incurred in respect of travel between the UK and your home country are allowable.

This includes subsistence costs whilst undertaking the journey, including hotel accommodation during transit to the said country and return to the UK. There is no limit for the number of journeys that can be claimed for the director/employee between the UK and the home country.

Costs of travel and subsistence for the employee/director’s family are also allowable. Claims for family members are restricted to two journeys each tax year.

More information in this respect can be found on the HMRC website on this link: http://www.hmrc.gov.uk/manuals/eimanual/EIM35030.htm

If after reading this, you believe these conditions apply to your circumstances, then the claim may be permissible.

Training Costs

Work-related training costs paid by the Company are allowable provided that the purpose of the training is to upgrade or enhance current skills. HMRC require ‘work-related training to “impact, instill, improve or reinforce any knowledge, skills or personal qualities which are likely to prove useful when an employee performs their duties of employment, or will better qualify the employee to perform those duties or participate in any charitable or voluntary activities arising through the employment.”

Costs include learning materials, examination and registration fees and associated travel and subsistence costs. Details of the expenditure, together with the time spent in the course of travelling each respective day must be provided.

VDU Eye Tests/Eye Wear

If you/staff are required to use VDU equipment the cost of an eye examination test is allowable. Where the examination shows that you/staff require corrective appliances with specific prescription to use for screen equipment reasonable costs are allowable. Where no corrective appliance is required the cost of the examination only is still allowable.


All expenses should be fully supported by original receipts.

To avoid potential problems, where appropriate it is vital that your Company enters into the contract and funds the expense, such as for mobile phone, Internet connection, computer equipment and training costs. The receipt must be in the Company name.


What are the legal requirements of a Limited Company?

A Limited Company must have at least one director and a registered office. Previously under the Companies Act 2006 it was necessary to appoint a Company Secretary, but this requirement was removed with effect from 6 April 2008. You as director of your own Limited Company may determine the ownership in terms of the allocation  of shares in the Company. Usually 100 per cent of the shares would be issued to you as the Managing Director.

The Registered Office of a Limited Company is the official place of residence of the Company. This must be within the jurisdiction in which the Company was incorporated; for a Company formed in England or Wales the registered office must be in England or Wales and for a Company formed in Scotland the office must be in Scotland. A Registered Office will usually be an Accountant’s office, your own office premises or your home office. If using your own home office it is wise to check that there are no restrictions to using commercial operations in the terms of any lease or mortgage agreement. A plaque or sign must be displayed outside the building to show that this is the Company Registered Office.

A Limited Company must file annual accounts and an annual return with Companies House. The return confirms who owns and who runs the Company. The Company must also file a Corporation Tax Return with HM Revenue & Customs (HMRC). Failure to file returns will result in penalty charges from HMRC.

Businesses with a turnover of more than £85,000 (from 1 April 2018) must be VAT registered.

Do I need a Limited Company or can I be a self-employed sole trader?

Technically, you do not need to set up a Limited Company to be a freelance contractor. You can work self-employed as a proprietor or sole trader of your own business, as a partner in a business, as an employee of an “umbrella” company or as a PAYE employee to an agent.

If your clients and agents are prepared to engage you on the basis of a self-employed sole trader then you may work in this way. However engagers are reluctant to as in the event that your tax status is challenged by  HMRC the client becomes liable for PAYE tax and National Insurance Contributions (NIC) due. Furthermore, if an Agency is involved, s44 Income Tax (Earnings and Pensions) Act 2003 prevents individuals from being self-employed as the Agency is required to treat the individual as if they were an employee and deduct PAYE and NIC  from payments made to the individual. It is important to note that no-one can determine their own status for tax and NIC purposes. Status is determined by the nature of the engagement i.e. contractual terms and working practices.

A Limited Company offers the owners (i.e. the shareholders) protection against liability for the Company’s debts. If the Company were to become insolvent as a shareholder you would lose only the value of your shares. As a director you would not be liable for the Company debts unless it could be proved that you had acted fraudulently or improperly under company law. However, HMRC is likely to pursue directors for any outstanding tax liabilities especially those in respect of PAYE deductions from salaries paid to directors (Regulation 42 Determination).

There is no reason why you cannot operate as self-employed or within a partnership other than that you will be restricted to finding clients directly. An alternative form of Company, introduced in April 2001 is a Limited Liability Partnership (LLP).

How do I set up a Limited Company?

A Limited Company can be formed with the help of a company formation bureau for a charge. You can deal with this purchase direct through the bureau or instruct an accountant to deal with this on your behalf. Once you have formed the company, the name and the Articles of Association can be very easily modified to your requirements. A company usually costs between £100 and £150 through a company formation bureau. You will need to notify Registrars at Companies House of any changes to the company, including the Company name, the directors, the Company Secretary (if appropriate) and the Registered Office.  The notification must be done on the correct forms.

Alternatively you can incorporate the Company yourself. This is a fairly straightforward procedure and can be quite a more cost effective option than using a third party formation service.

What are the duties of a director of a Limited Company?

The post of director has a number of responsibilities and requirements. This includes to ensure that the Company is run properly, according to the law and in the interests of the shareholders. A leaflet produced by Companies House GBA1 explains the basics about being a director of a Company.

You can find out more about this in the guidance booklets available via the Companies House website.

Companies House Directors and Secretaries Guide
Companies House guidance booklets

Am I an employee of my Company?

As a director of a Limited Company you are not an employee of that Company unless you have a contract of employment. However, for tax and National Insurance purposes you are an officer of the Company and treated as an employee.

If a contract is in place this will specify the expected duties, salary, benefits, holiday entitlement in the same way as any other employment contract you might have held. With an employment contract in place you will have to bear in mind the knock on effects of responsibilities under the National Minimum Wage/National Living Wage and other statutory employment benefits.

If you are to set up formal contracts of employment with your Company, we strongly recommend that you seek employment law specialist advice.

What is a Limited Company able to do?

A Limited Company is a legal entity in its own right. You as a director and the Company are seen as separate persons under Company law. A Limited Company can own property or equipment such as computers. The Company should have its own business bank account, accounts with suppliers and  can hold shares in other companies.

Important Dates

This is a summary of the various dates and timings you should be aware of:
Once the Company is set up you need to register the Company for Corporation Tax with HM Revenue & Customs by completing form CT41G. This will usually be sent to the registered office approximately one month after incorporation.

Companies House

If your Company’s first accounts cover a period of more than 12 months, you must deliver them to Companies House within 21 months of the date of incorporation for private companies (within 18 months for public companies), or 3 months from the accounting reference date, whichever is the longer. In subsequent years a private company has 9 months from the end of the accounting reference period to deliver accounts.

Annual Return (363)

The annual return is prepared at the anniversary of the company’s incorporation, it is then due 28 days after this date. Failure to file the Return may result in your Company being struck off the register.

HMRC – Full Annual Accounts & Corporation Tax Return (CT600)

To be sent to HMRC within 12 months of the year end. (Earlier dates may apply to the first year).

Corporation Tax

Payment of Corporation Tax is due 9 months after the year end. (Earlier dates may apply in the first year).

VAT Returns and Payment

Due at the end of the month following each quarter.

As an example:
  • Quarter ending 31 March Due by 30 April
  • Quarter ending 30 June Due by 31 July
  • Quarter ending 30 September Due by 31 October
  • Quarter ending 31 December Due by 31 January


  • Forms P11D & P11D(b)
  • Due after the end of each tax year and should reach HMRC by 6 July.
  • Deductions from salary should be paid 14 days after the end of the period.

Assuming that the Company is eligible for quarterly payments they will be due by:

  • Quarter from 6 April to 5  July – payment due by 22 July
  • Quarter from 6 July to 5  October – payment due by 22 October
  • Quarter from 6 October to 5 January – payment due by 22 January
  • Quarter from 6 January to 5 April – payment due by 22 April


Relates to National Insurance Contributions on certain benefits in kind such as medical insurance, beneficial loans, company cars etc. If this applies this payment is due by 22 July following the end of the tax year.


Self Assessment Tax Return and first Payment on account

Due by 31 January

Second Payment on Account Due by 31 July.

Pensions Guide

The information below is intended to give freelancers an overview of the options available to them when considering planning for their retirement. The information does not constitute legal or financial advice and neither IMS nor any contributor to the guide may be held responsible for any consequences of actions taken as a result of reading it. The reader should use their judgment to decide whether or not they feel competent to arrive at decisions on these matters and, if not, seek bespoke professional advice.


Most people reach a stage in their life when they either no longer have the option or no longer have the desire to work to generate income. Although there are many factors that will affect the quality of their ongoing lifestyle from that point, it is usually the extent of their financial resources that has the predominant influence

In most circumstances it is safe to assume that a capital resource of £100,000 will generate an ongoing income of £5,000 per annum (5 per cent). So someone wishing to retire on £25,000 per annum today would require income generating assets (i.e. excluding main residence, cars, house contents, etc) of approximately £500,000.

The generation of such an amount of free capital takes careful planning, and must be considered as a long-term and ongoing project.

There are a number of issues that have a bearing on retirement planning:

  • How long is there between now and when you wish to retire?
  • What investment vehicle do you wish to use?
  • How much is available to invest towards retirement planning?
  • What income do you require in retirement?

The full range of pension investment options is considered in our pensions guide PDF available above, but for alternative investment schemes outside the realm of pensions, bespoke professional advice should be sought. Contact IMS for guidance.

Freelancing, IR35 and Pensions

Pension planning can be a useful tax saving tool whether you are inside or outside IR35, however the biggest benefit will be to those inside IR35.

IR35 legislation forces you to take 95 per cent of your net turnover as salary, incurring tax and employees and employers NI — a very expensive way of working. However there are expenses that you are allowed to claim before using this 95 per cent formula. One of these expenses is employer contributions to a pension plan. Simply put this reduces the amount on which you need to calculate the 95 per cent, thus saving potentially 40 per cent tax, up to 12 per cent employees NI and 13.8 per cent employers NI. Obviously this equates to an extremely large saving, and one that must be considered.

For those outside IR35, the savings are less because you have control over how much salary you pay yourself — you will save the tax in much the same way, but the NI savings will be less because your salary level is likely to be that much less. However, it should be noted that limited company contributions to a pension scheme are still one of the most tax efficient ways of extracting money from a limited company and in most cases are an allowable business expense to claim against corporation tax.

Pension information provided in association with Wealth Matters.

Tax Return

IMS is here to assist you with the completion of your self-assessment Tax Return. To give you a basic understanding of the whole process, here is a quick guide:

  • The tax year in the UK starts on 6 April and ends on the 5 April each year.
  • If you need to complete a Self Assessment Tax Return for the first time you need to register with HM Revenue & Customs (HMRC). You will need to complete a form SA1 to obtain a Unique Taxpayer Reference (UTR) which can be downloaded from the HMRC website.
  • HMRC will send your UTR which is a 10 numeral reference number that is unique to self-assessment taxpayers.
  • Once you have received your UTR please send this to our Tax Department or to your usual contact. Note HMRC will not issue the UTR to us. Also, if you lose your UTR, HMRC will not advise you of your UTR Number over the telephone, so keep it safe.
  • At the end of the tax year we will send you a letter/email, together with a checklist requesting details of all your income and any expenses you have incurred personally. From the information you provide we will complete your Tax Return. Any expenditure that has gone through your company is not required for the purposes of completing your Tax Return.
  • The Tax Return has to be submitted to HMRC on, or before, 31 January each year . This time limit is for the online submission which we use. The 31 October deadline is for paper returns.
  • Once the Tax Return is completed we will send this to you to confirm that it is complete and correct. We will, at that time advise you of any liability to or repayment of tax that might be due.
  • Following receipt of your confirmation that the Tax Return is complete and correct we will send the electronic copy to HMRC. HMRC will in turn send us confirmation that the Tax Return has been received.
  • The Tax Return and any tax due must be sent to HMRC to reach them on, or before, 31 January each year. Automatic penalties and interest will be charged for late payment. A 5% surcharge will apply if the payment is not received by 28 February. If the payment is still not received by 31 August a further 5% surcharge will be made.
  • If HMRC send you a Tax Return and you fail to send it back at some later stage they will issue a determination of tax due. Put simply this is an estimate of the tax they think you owe. Only the submission of the Tax Return can overturn the tax in charge.
  • HMRC have 12 months from the date of receipt of the Tax Return to conduct an enquiry to check that the Return is complete and correct. Penalties of up to 100% of the tax “lost” are charged for the submission of incorrect Tax Returns plus interest.

IR35 Guide

Contractors need to show that they are operating on a genuine business to business basis and should ensure that their end client recognises this. There is no one deciding factor – all factors have to be considered. IR35 continues to cause confusion as much depends on the contractor’s individual circumstances, working practices and the specific contract being carried out.

We have set out below the main points that you should be considering. These factors include:

Control and Management

The right of  control and management should be considered. This should include  “how, where, what and when” the work is done.  There will always potentially be a level of supervision as even a professional person will require some initial briefing from the end client.

However, you should be able to control where you provide your services, including of course from your own premises. You should be able to choose when you work and dictate your own hours. Where the client has the right to control what, when, where and how you carry out your work, such as moving you from job to job this will be an indicator of employment. Where you are required to provide your services, adhering to start and finish times in the day and having specific days that you work etc are also indicators of employment.

To avoid being caught within IR35 the contract and the actual working arrangements should be as free as possible from aspects of control and requirements of where and how you provide your services.

Right of Substitution

The Right of Substitution should be considered. Personal service is an essential element of a contract of employment. The right of substitution is a fundamental status test and if it is genuinely possible to send a substitute there can be no employment. A person who has the freedom to choose whether to do the task themselves or hire somebody else to do it on their behalf (on a reasonably unfettered basis) is probably self employed.

Ideally it should be possible to provide substitutes both “internally”  and “externally.” By internally this means a substitute provided from the Personal Service Company which is recognised as impracticable as in the majority of cases it is likely to be only only you! Where there is a right to send an external substitute to provide the services this is likely to prove a stronger argument than if restricted to an internal substitute.

The right of substitution, both internally and externally,  should be written into all contracts with the end client acknowledging this. Your Company should pay any substitute. It is important that any clause in the Contract for Services is a genuine right.

The contract clause states the above but it is equally, if not more important, to be able to demonstrate that a substitute has actually been provided and has been paid by the Company.

To avoid being caught within IR35 the right of substitution should be written into all contracts, including the end client acknowledging this, with the Company paying any substitute to help establish your right to substitution.

Mutuality of Obligation

The Mutuality of Obligation (MOO) should be considered.  MOO is a complex issue but broadly this means looking to see if any obligation exists for your client to offer work and for you to accept work offered. MOO is a defining feature of employment; if no MOO exists the contract cannot be characterised as a contract of employment and so IR35 will not apply. Although HMRC accepts this when applying this test they will look to see if there is an actual or an implied MOO existing.

The contract must include a clause to demonstrate that no MOO exists. The longer a contract has been in place the more difficult it would be to persuade HMRC there is no MOO,  implied or otherwise,  and are likely to be more vulnerable to a challenge by HMRC.

To avoid being caught within IR35 the contract should clearly set out what is expected by you as the contractor and where possible no additional work should be done.

Financial Risk/In Business of your Own Account

The financial risk and whether you are in business of your own account should be considered. It is important to demonstrate that a person conducts a business on their own account and has the opportunity of profiting from sound management. This would include bearing the running costs and paying the overheads of the business, such as having your own business telephone line,  printed and logo-ed stationery, having your own office,  purchasing your own assets,  using your own equipment, hiring your own workers etc.

Financial risk could also be taken as quoting a fixed price for a job, with the consequent risk of bearing the additional costs if work overruns. Employees tend to work on fixed rates, paid weekly, monthly etc. and may also be paid for overtime. Contractors tend to be paid a fixed sum for a particular job. If you are paid regular guaranteed weekly or monthly amounts this can be regarded as akin to salary rather than professional fees.

The length of the engagement should also be considered. Regular working for the same client and long periods working for one client may be indicative that there is a single and continuing contract of employment. You should be able to provide your services for others and promote your Company in the market place. Having more than one contract that a contractor is working on strengthens the case for being in business on their own account and the contract should reflect this.

To avoid being caught within IR35 you should be able to satisfy as many of the above aspects as possible. The contract and the actual working arrangements should include working for a fixed price, agreeing to correct defective work at your cost, providing your own insurance cover etc. If you cannot charge a fixed price, invoices should be issued with any expenses included in the rate rather than relying on time sheets. You should also endeavour to have more than one client you are working on at any one time and ensure that the contract does not contain any clauses that prevent you from working for other clients at the same time.

Intention of Parties

The intention of parties should be considered. The contract should always clarify that the intentions of the parties is one of supplier and customer.

To avoid being caught within IR35 the contract should include a clause clearly stating the intention of both parties is that of supplier and customer to strengthen a case in the event of a challenge by HMRC.

Part and Parcel of Organisation

Whether you can be regarded as part and parcel of organisation should be considered.  Case law does not support any contention HMRC may make but consideration should be given to whether you manage staff within the organisation or are managed yourself, whether you attend staff meetings (not related to the services being provided by you), whether you appear on the internal phone lists & email addresses, whether you follow similar work patterns and holiday leave as employees of the organisation, whether you join in staff events such as social events, Christmas parties etc and whether you use staff facilities and benefits such as car parks, canteens etc.

To avoid being caught within IR35 the contract and the working practices should not include any of the above.

Provision of Equipment

The use of equipment should be considered. Where practically possible you should use your own equipment rather than that of the client. There will however be occasions where the client  requires you to use their equipment, for Health & Safety reasons for example which is acceptable. Whilst this factor alone will not result in an engagement falling within IR35 it is one factor that will be count towards or against the overall decision.

To avoid being caught within IR35 the contract and the actual working arrangements should be able to show that you use your own equipment.

Hiring Workers

If you hire workers this is a strong indicator of self-employment and shows that you are genuinely in business on your own account.


HM Revenue & Customs (HMRC)  introduced the ‘Intermediaries Legislation’ known as IR35 in April 2000 to address what HMRC called  “disguised employment”.  HMRC’s Office of Tax Simplification continue to consider the rules surrounding IR35 and this area continues to cause confusion as much depends on the contractor’s individual circumstances, their working practices and the specify contracts worked on. Below is a guide to the current rules.

Where an individual would be treated as an employee were it not for the fact they provide their services through the medium of a Limited Liability Company under IR35 HMRC have the ability  to treat all income of the Company as salary of the director. This ‘deemed’ salary is liable to PAYE, Class 1 National Insurance Contributions (NIC). Certain expenses can be deducted from the income arising from relevant engagements, including travel and other expenses that can be claimed under under Section 336 ITEPA 2003, a flat rate 5% of the gross income, employer contributions to approved pension schemes, Employer’s NIC, Professional Indemnity Insurance and Professional subscriptions.

There is no statutory definition of employment – employment status cases and IR35 cases are reliant on case law. When considering whether or not you are caught by IR35 HMRC will consider the facts including a review of the working arrangements in place. There is no one deciding factor – all factors have to be considered.

See IR35 Guide for more information.


Legal and Director Duties

Legal Requirements

A Limited Company is owned by its shareholders. Dividends are a proportion of post-tax profits and may be paid to shareholders of a Company. When a Company intends to pay out a dividend it holds directors’ and shareholders’ meetings to declare such dividends. It is necessary for the meetings to be documented and to conform to the law.

Directors can pay dividends if it appears to them that they are justified by the profits of the company available for distribution. This can only be done by reference to the accounts of the company. (This requirement is met when you receive a breakdown of your company’s profit position as part of the service). A company may only make distributions out of its profits available for distribution. The technical definition is its accumulated, realised profits so far as not previously distributed or capitalised, less its accumulated, realised losses so far as not previously written off in a reduction or reorganisation of capital.

Many companies declare dividends once or twice a year. However there is nothing in principle preventing a company from declaring dividends as often as it likes provided there are available profits out of which to declare the dividends.

Dividends are not an allowable deduction in calculating corporation tax profits and therefore the corporation tax liability will be the same regardless of whether dividends are paid out or funds are retained in the Company.

It is important that correct procedures are followed with regard to the payment of dividends to protect against HM Revenue & Customs (HMRC) deeming a dividend paid as being disguised salary.

Director’s Duty

In addition to satisfying the statutory tests, when considering whether a dividend can be paid, the directors of a company must have regard to the company’s best interest generally (e.g. by having due regard to the future cash requirements of the business and to the present and future solvency of the company).

How Are Dividends Taxed?

In the tax year, 6 April 2020 to 5 April 2021, the tax you pay on dividends will depend on what tax band you’re in:

Tax band Tax rate on dividends over £5,000
Basic rate 7.5%
Higher rate 32.5%
Additional rate 38.1%

How Much Dividend Should I Pay Myself?

Extracting dividends and mitigating personal tax.

If you decide to pay the maximum amount of dividend based on company profits, you can extract all realised profits after tax as a dividend, provided you have enough cash in the company bank account and have followed the appropriate steps.

You may, however, opt to leave some retained profits in the company to allow for the future business needs of the company or if circumstances change or to mitigate personal tax.

The fact that you can decide when to pay dividends to the shareholder(s) gives you flexibility in tax planning.

If you keep your personal total gross income, including dividends, below the Upper Earnings Level (£50,000) for the tax year, you can limit any personal liability to tax on dividends to 7.5%. The surplus of any profits can always be retained in the company and extracted in a future tax year.

Bear in mind that the actual amount of dividend you can pay yourself will depend on all income that you earn (including from salary, dividends, interest, rental income etc.) throughout the tax year.

If you tell us about any previous income you earned in this tax year (e.g. from previous employment), along with any potential income you expect to earn outside of your company (e.g. rental income, interest etc. from other sources), we will be able to calculate an estimate and help you monitor your potential personal tax liability throughout the tax year to ensure that you do not exceed this Upper Earnings Limit. If you do exceed the limit, our estimate will provide you with an indication of the amount to set aside in your personal capacity to cover any potential personal tax assessed and payable (through Self-Assessment) on your personal income, including dividends.




Companies must operate PAYE on salaries paid to their employees/officers. This includes salaries paid to directors acting in the capacity of an officer of the company.

The basic personal allowance or ‘’free pay’’ is the amount of taxable income an individual is allowed to receive tax-free each tax year.

This tax year 6 April 2019 to 5 April 2020 this allowance is set at £12,500.00. Individuals will lose their personal tax allowance at a rate of £1 for every £2 of earnings in excess of £100,000 per tax year.

Income Tax

Income Tax is deducted from earnings exceeding the personal tax allowance as follows:

Rate Earnings % Tax
Basic £0 – £37,500 =  20%
Higher £37,501 – £150,000 =   40%
Additional Over £150,000 =   45%

Tax year:  6 April 2019 to 5 April 2020

National Insurance

National Insurance Contributions (NIC) are paid on your earnings and benefits above a certain amount. NIC builds up your entitlement to a State Pension and other Social Security benefits. If you earn over a certain amount, your employer (your company if you are the business owner / director) must deduct Class 1 NIC from your wages through the Pay As You Earn (PAYE) system.

Your employer (your company if you are the business owner / director) also pays Class 1 Employer NIC based on your earnings and benefits above a certain level. HM Revenue & Customs (HMRC) keeps track of your contributions through your National Insurance number. This is like an account number and is unique to you. So long as you earn more than £118 (6 April 2019 to 5 April 2020) a week (£6,136 per annum) you can still build up your entitlement to a State Pension and certain other benefits. This is known as the ‘Lower Earnings Limit’.

If you are the business owner / director, paying yourself a  salary above this level will mean your Company will have to register for a PAYE scheme and operate under Real Time Information (RTI). You can, however, earn up to £166 a week (£8,632 per annum) before you pay any Employee’s NIC. This is known as the ‘Primary Threshold’. Any salary paid above ‘Primary Threshold’ of £166 per week (£8,632 per annum) will incur Employee’s NIC at a rate of 12% and a further 2% on any salary paid above the ‘Upper Earnings Limit’ of £962 per week (£50,000 per annum).

Any salary paid above the ‘Secondary Threshold’ of £166 per week (£8,632 per annum) will be liable to Employer’s NIC. This is charged to the employer (your company if you are a the business owner / director) currently at a rate of 13.8%. Directors pay Income Tax on their earnings in the same way as other employees. However, NIC is worked out over an ‘Annual Earnings Period’ – from 6 April to the following 5 April rather than over the normal weekly or monthly periods that apply to employees. This is to ensure the director pays the correct amount of NIC.

Deciding How Much Salary to Pay if you are a Director

If you are a business owner/director of your own company, you are free to decide what level of salary you wish to pay yourself. By law, employees between the age of 18 – 20 years must be paid at least the National Minimum Wage (NMW) of £8.21. For employees aged 21 – 24, the National Living Wage (NLW) of £7.70 per hour applies. For employees 25 and over, the NLW of £8.21 per hour applies. Directors, however, are not employees but are officers of the company and therefore are not subject to the NMW or the NLW legislation (unless there is an employment contract in place between the company and yourself).

Since salary is subject to both PAYE and NIC and dividends are not subject to NIC, paying yourself a low salary and a higher dividend will result in maximising your income. Setting a salary of £8,632 per annum will not attract any Employer’s or Employee’s NIC or PAYE (assuming you have no previous or other income).

You should note that although perfectly legal, paying no or a low salary could increase the chances of triggering an investigation by HMRC. If this concerns you, you may decide to pay yourself the NMW/NLW (£8.21/£8.21 per hour) or higher. By way of example, for an employee 25 or over, this is 15,106 per annum if you worked 230 days at 8 hours per day.

Paying the NMW/NLW will result in a higher salary (based on a normal working week) but of course there will be a liability to PAYE and NIC, both employee and employer contributions. You may decide to be paid a level of salary higher than the NMW/NLW, which will further increase your liability to PAYE and NIC. The salary paid by the company will attract Corporation Tax relief at 19% so the decision needs to be considered carefully. When making this decision you would need to consider whether IR35 applies.

In the case of Personal Service Companies, if you are operating inside of IR35, all income from that contract, after certain allowable expenses, is subject to full PAYE and NIC. Where there is uncertainty on your IR35 status or if it applies, you should seek independent expert advice to reduce the risk of investigation, and potential penalties and interest if a future decision goes against you.  It is therefore important to always assess every contract to determine your IR35 status  before deciding on a salary level.

To look closer at the income tax on a director’s salary and how this is taxed for the current year 6 April 2019 to 5 April 2020 we have set out below a summary of the rates and thresholds (PAYE tax and Class 1 NIC). This should be read in conjunction with the section on Dividends as this takes a closer look at the most tax efficient way of extracting profits from the company in a tax year.

Summary of rates and thresholds (PAYE tax and Class 1 NIC thresholds)

Rates and Thresholds
PAYE tax threshold £240 per week; £1,042 per month; £12,500.00 per year (also known as personal allowance or free pay)
Basic 20% on annual earnings above the PAYE tax threshold and up to £37,500
Higher Higher tax rate = 40% on annual earnings from £37,501 to £150,000
Additional 45% on annual earnings above £150,000

Emergency tax code = 1250L W1 Wk1/Mth1


Thresholds Earnings Levels
Lower earnings limit (LEL) £118 per week; £512 per month; £6,136 per year
Secondary Threshold (ST) £166 per week; £720 per month; £8,632 per year
Primary Threshold (PT) £166 per week; £719 per month; £719 per year
Upper earnings limit (UEL) £962 per week; £4,167 per month; £50,000 per year


Combined PAYE & NIC tax payable on salary: *

Salary Tax
up to £8,632 (PT) 0% (Employee’s NIC of 12% + PAYE tax of 0% in this bracket)
above £8,632 (PT) to £12,500.00 (PAYE tax threshold) 12% (Employee’s NIC of 12% + PAYE tax of 20% on this next bracket)
above £12,500.00 to £50,000 (UEL) 32% (Employee’s NIC of 12% + PAYE tax of 20% in this bracket)
from £50,000 to £100,000 42% (Employee’s NIC of 2% + PAYE tax of 40% in this bracket)
from £100,000 to £122,000 62% (Employee’s NIC of 2% + PAYE tax of 60% in this bracket)
from £122,000 to £150,000 42% (Employee’s NIC of 2% + PAYE tax of 40% in this bracket)
over £150,000 47% (Employee’s NIC of 2% + PAYE tax of 45% in this bracket)

There is also Employer’s NIC to pay on any salary above £8,632 (ST) of 166%. No NIC is payable on dividend income.