Best time to form a Limited Company

If you’re starting out as a contractor, or perhaps you’re already a freelancer and changing the way you work, you may be wondering “When is the best time to set up a limited company?”.

We’re often asked whether forming at certain times of year, i.e. in line with the tax tear would save tax and simplify calculations for accounting purposes. Financially speaking, the short answer is that there is no optimum time of year, but here we answer some commonly asked questions to explore the factors you should consider ensuring the time is right for you, potentially maximising your tax efficiency along the way.

What do I need first: a Contract or a Limited Company?

While this seems like a chicken and egg situation (and this may sound obvious), your end client can only offer a contract for your company to provide them a service once your company exists. For this reason, most people we speak to who have already been in discussions with their own potential clients need their formation complete asap, in order to secure their contract. Providing you have all the necessary details, and the time of the day your formation is submitted (the earlier the better); formations can be complete on a same day basis, so when you’re ready to hit that button it’s all systems go!

If you’ve researched the different ways of working and feel this is the right avenue for you, then there’s no time like the present.

Does my formation date affect my accounting deadlines?

As a director of a limited company there are certain obligations you’ll need to fulfil including submitting annual company accounts and corporation tax returns. These submissions will cover your company’s financial year which usually run over a 12-month period.

The month in which you form your company determines the year end – it’ll be at the end of the month in which the anniversary of company set-up falls. So, the accounting period will cover the same number of months no matter when it’s formed.

Let’s use Bob as our example:

Bob sets up his company on the 15th of October 2022, so his company year-end is the 31st of October 2023. Bob’s first annual company accounts he needs to report will cover the period 15^th October 2022 to 31st October 2023 – this is due in July 2024. Going forwards, the subsequent accounting periods would be 1^st November to 31^st October the following year.

Some people prefer their company financial year end to run in line with the April tax year, this is just for their own personal preference and is by no means a necessity. If this is the case for you, there’s no need to wait until April to set up your company, it is possible to change your year end, but to ensure clean and simple reporting and records it is not recommended to keep changing this.

Does the month I form a company affect the level of income tax I pay?

As the level of income tax you pay is based upon your income, be it through salary, or a mix of salary and dividends, it’s not your company formation date that influences this, but more so the date in which you start receiving income from your company.

The closer that we are to the end of the tax year (5th of April) the higher your earnings in that year could be. This means that any dividends taken from the company before the 5th of April could well fall immediately into higher rate tax (depending on your earnings). You should discuss with your accountant the tax implications of doing so to ensure you’re aware of the best time to draw dividends from the company.

If you find yourself falling into the higher rate, there are two options: if you can afford to, it is a good idea to leave the funds in the company until the new tax year starts, when your tax allowances will start again. The second option is to withdraw the dividends; you will then have to pay higher rate tax on those dividends but this is generally cheaper than paying umbrella company taxes.

I’m working as a sole trader, is there a point I’d be better off with a Limited Company?

Many start-ups initially choose the Sole Trader route with a view to changing to limited further down the line once profits grow, the main reason for this being tax efficiency. Usually, this is once predicted annual profits exceed £30,000. To read more about the advantages of setting up a limited company see here.

Ready to Setup?

If you’ve got your ducks in a row and have concluded that a limited company is the best way of working for you, then from the wise words of Benjamin Franklin, “Don’t put off until tomorrow what you can do today”.

Find out more about our same day formation service here. Or, If you would like to talk things through and double check the impact of having a limited company on your take home pay then please do get in touch.