What are the costs of running a limited company?

It’s important when looking to enter the world of contracting to have an idea of the costs of running a limited company.

In this article we will go through the ‘essentials’, plus any extras you may need; with the aim of giving you a clear picture of how much a limited company will cost, or is expected to cost, writes Christian Hickmott, CEO of Integro Accounting.

Set-up costs

Let’s start with the basics. What are the initial costs of getting your company up and running?

• Company formation

This is a small expense if you go directly to Companies House; in fact it’s currently just £12.00 to form a company! Companies House will take approx. 24 hours to form a company and you can speed this process up by opting for same day registration online. That is, if you complete the necessary before 3pm and are willing to pay the princely sum of £100.00!

If you would rather register your company through a third party, such as an accountant, it can be a little more expensive. However, with an accountant, it does mean you can be confident everything is handled correctly and will frequently include the option of using a different registered office address. This means that you get to keep your home address away from the public record; and moving forward your accountant can receive mail from HMRC and Companies House directly, and deal with it on your behalf. Using an accountant to register a company can cost upwards of £100, dependent on the level of support and service required.

Running costs

Following the initial formation cost you should also factor in some essentials needed to maintain your business; while also establishing a clear idea of any taxes accruing. These essentials include:

• Accountancy Fees

The cost of an accountant will vary, and this is not entirely based on how much of the legwork you choose to do yourself, but also on the accountant you choose. Before you appoint an accountant, make sure you ask about any ‘hidden’ extras. For example, if they charge extra for registered office address usage, bookkeeping software or personal tax returns, to name but three.

Many veteran contractors may decide to manage all their accounting affairs without support. However, a good accountant will supply far more than the HMRC compliance advice revolving around your filing obligations! The accountant should also include personal tax planning, company tax advice, have experience of advising and assisting those in your sector, as well as staying up-to-date with all changes to the pertinent legislation.

Paying an accountant who is abreast of relevant legislation and can provide you with individualised tax planning should always be far more cost-effective than doing so in your own time. In trying to gauge if the price attached to the service you’re considering is fair, perhaps ask yourself  how much you charge to become both familiar and competent with all relevant legislation and rules; the filing regulations and requirements; the planning required for upcoming tax changes; and staying on top of all HMRC and Companies House correspondence.

But bear in mind that with accountants, there are typically two types of fee models – fixed fee and variable fees. Variable fees can frequently work out more expensive as you are charged for every interaction you have; often in 6-minute increments. The benefit of fixed fee is that you know where you are on a monthly basis; and will receive all the support you require without worrying about additional outlay further down the line.

• Business Insurance

Different businesses will require different insurance policies; the majority hold at least one. The most common are professional indemnity, public liability and employers’ liability.

Professional indemnity insurance is not a legal requirement. However, it is certainly worth considering for your company, as it covers the majority of the risks associated with running your own business; and many clients will insist that you have it before engaging with your company for any contractor services.

Public liability (which will often also include product liability) covers your dealings with third parties i.e. anyone you don’t employ. For example, if your business causes an injury to a member of the public, this insurance will cover you for legal and compensation costs. Organisers of trade fairs or events will often insist that you have public liability insurance.

Employers’ liability is the only insurance required by law if you have any employees, be they full or part time. This will cover workplace injury or property damage claims should they be made by an employee.

The cost for all of these will depend on what you need for your business; ranging from relatively cheap, ranging from around £220 per year (as quoted at the time of writing by Kingsbridge Insurance) to the more expensive -- as you bolt on any extras. These extras could include (but are not limited to) cyber security, income protection and legal expenses insurances.

It’s also worth noting that most recruitment agencies and end-clients demand that contractors have these insurances, so without them you could miss out on business opportunities. Such cover will give you the relevant company protection and give you, as an individual, peace of mind. To that end, I have heard many an insurance salesperson warn, ‘You wouldn’t drive a car without insurance and you shouldn’t run a company without insurance either.’ In our experience, there is actually some truth in that. In addition, this type of insurance demonstrates that you are a legitimate business and is a (minor) pointer in safeguarding outside IR35 status.

• Company bookkeeping software

There are some excellent bookkeeping software packages available. Some accountancy firms will provide one as part of their inclusive package, while others will have their own in-house solutions. For example, we include FreeAgent as standard. Be aware that some accountants will charge extra for such software; and while in many cases it is not a ‘hidden’ cost, the cost can still add up surprisingly quickly over a year.

As mentioned, some accountants offer a ‘bespoke’ in-house solution. These can often sound and even look good. But generally speaking, it’s still rare for accountants to be the best software developers or UX / Ui people, potentially resulting in an experience that misses the mark.

Alternatively, there are a number of established cloud based solutions available, including the afore-mentioned FreeAgent (£145 purchased directly at the time of writing), Xero (£10-£30 per month). Likewise Quickbooks and Sage offer cloud solutions ranging from £6 to £15 a month for basic packages, with optional add-ons available.

• Company expenses, taxes and potential fines

Ordinarily, we would not generally refer to the above as ‘running’ expenses. But two of these three are payments that will leave the company bank account at some point; and it takes just one missed deadline for the third to leave your account too! So, limited company contractors ought to be mindful of these.

Tax return and tax payment deadline dates (two separate dates for the same reporting period); VAT return dates and RTI filings deadlines for PAYE, are among the important, potentially expensive cut-offs that you’ll need to keep on top of. Miss just one of these and you could face a hefty penalty.

The fines for flouting the above range from a couple of hundred to a few THOUSAND pounds – so not something anyone will have budgeted for. Making sure you therefore know of your filing and payment deadlines, and crucially meeting them, is a must. If you don’t, the cost of running a limited company can increase significantly.

In addition, it is important to investigate and be certain of what you can and can’t claim as company expenses. Company expenses can reduce your tax bill; so while not a cost, as such, there are definitely savings to be made from reducing your tax bill.

• Companies House confirmation statement

There is an annual fee of £13 paid to Companies House to confirm the company details. This is a mandatory filing requirement and cost.

The final tot-up

You can see that setting up a limited company needn’t cost a fortune.

There are some charges that are fixed and some that will require you to do your research, such as finding the best accountant for you; who is usually the one who will get to know you and your business. As with many choices in life, we would advise that you never just go for what appears to be the cheapest option. Do your research; speak to colleagues; and make sure you speak to a few different accountancy providers before making your decision.

With your accountant in place, it then shouldn’t be too much work for you to establish your limited company’s standard monthly running costs quickly and somewhat definitively, thereby helping you avoid a nasty surprise further down the line! Then it’s over to you to actually make running your limited company worthwhile and good value for money – an article for another day!