The costs of running a limited company

Entering the world of contracting with your very own limited company can be a rewarding and potentially lucrative pursuit.

But to be truly successful, it’s important to understand the financial terrain in which you’re operating, writes Lara Hodkinson, head of accounting at Danbro Accounting.

Here’ exclusively for Free-Work, we’ll explore the real cost of running a limited company as 2023 runs down, and the 2024-25 tax year comes into view from April 6th 2024.

Limited company set-up, from as little as £12…

Establishing your limited company marks the first step in your contracting and expenditure journey!

Companies House offers a cost-effective option at just £12 for company formation.

However, many contractors opt for the expertise and peace of mind provided by an accountant, and we’d obviously recommend that route!

Hiring an accountant to help with company formation will require an initial investment, but it brings invaluable guidance, assurance on compliance, and the option to use a different registered office address to safeguard your personal details.

Paying an accountant

The choice of your accountant is critical. Beyond regulatory compliance, a proficient accountant should offer personalised tax planning, company tax advice, and industry-specific expertise.

The cost of accounting services can vary depending on their scope of services and their fee structure. Understanding whether they charge extra for services like registered office address usage, accounting software, or personal tax returns is important. Some accountants offer fixed fees, ensuring welcome transparency and predictability in your monthly expenses.

Staff expenses?

If you’re planning to hire staff, it's essential to account for their salaries, benefits, and other associated expenses.

Additionally, consider the costs of recruiting, onboarding, and training employees, if you’re not going to be a sole-person business. Efficiently managing your staff budget is vital for the long-term success of your limited company.

IT infrastructure, security and software (doesn’t come cheap)

Investing in robust IT infrastructure and security measures is essential for protecting your company's sensitive data and ensuring smooth operations, particularly for those contractors who will be working in the technology space.

Costs may include hardware, software, cybersecurity services, and data backup solutions. These expenses are crucial for safeguarding your business from potential cyber threats and data breaches, even if you won’t be facing the tech sector.

Business insurance

Contractors using limited companies often require various insurance policies to enable them to carry out their duties safely and securely.

This includes professional indemnity insurance, public liability insurance, and employers' liability insurance. While professional indemnity insurance is not legally mandated, it's highly recommended as it covers many business risks. Public liability insurance, on the other hand, is essential for interactions with third parties, and employers' liability protection is mandatory if you have employees. The cost of these policies can vary, with additional coverage options available. So shop around!

Accounting software

Efficient bookkeeping is vital for the financial management of your business. Some accountants provide software as part of their services, while others may charge extra for cloud-based solutions like FreeAgent, Xero, QuickBooks, or Sage. Investing in the right software can streamline your financial processes and enhance accuracy.

Expenses, taxes and even potentially, HMRC penalties

Managing your company’s expenses, taxes, and deadlines is paramount.

Missing deadlines can result in substantial penalties from the relevant authorities (like HMRC), so make sure you stay well-informed about tax returns, payment deadlines, and VAT returns.

At the same time, understanding and claiming legitimate company expenses can help reduce your tax liability. It’s worth considering consulting a tax specialist to optimise your tax strategy.

Mandatory Companies House fee

You might think at this stage -- with all the above outlays accounted for -- you’ve got all your costs present, correct and calculated!

But don't overlook the annual fee of £13 you’ll pay to Companies House to confirm your company's details. This is a mandatory requirement that must be addressed promptly.

To keep company costs to a minimum, make careful, well-informed decisions…

So, what have we learnt? Running a limited company inevitably incurs various costs, including IT infrastructure, staff expenses, and tax considerations.

However, with proper planning and the right support, operating as a limited company can be financially and personally rewarding. As you navigate your new business landscape, remember that making informed choices about accountants, insurance, software, compliance, and IT security can help you avoid unexpected surprises and position your limited company for success in 2023 and beyond.