Many contractors choose to work through limited companies because it is the most tax-efficient way to operate, especially if they are not subject to IR35 regulations. However, those who dislike paperwork, are contracting for a short period, or fall under IR35 may prefer contracting through an umbrella company for its "hassle-free" nature.

Advantages of Limited Companies:

1. Tax Efficiency:
   • Contractors working through a limited company often pay themselves a minimal salary (to minimize PAYE and NIC obligations) and take the remainder of their earnings as dividends, which are not subject to NICs.
   • Even under IR35, there can be benefits such as the flat rate VAT scheme and the 5% expense allowance, subject to eligibility.
2. Professional Image:
   • Having a company can project a more professional image, which can be beneficial if you have other business interests.
3. Limited Liability:
   • As the name suggests, your personal liability as a director is limited, although personal guarantees for bank loans are an exception.
4. Control and Flexibility:
   • Directors have full control over the company’s financial and administrative matters.
   • Ownership can be divided among multiple shareholders, aiding in tax planning, attracting investors, or distributing ownership.
5. Remuneration Control:
   • Owners have more control over their compensation, allowing for optimal salary and dividend splits.
6. Transferability and Sale:
   • A limited company can be easily sold or passed on to future generations.
   • Entrepreneurs’ Relief may apply, allowing for a 10% CGT on share sale proceeds if certain conditions are met.

Disadvantages of Limited Companies:

1. Administrative Burden:
   • Running a limited company requires more administration compared to working through an umbrella company, although an accountant can handle much of this work.
2. Costs:
   • There are costs associated with starting and running a company, including filing fees, accountancy fees, stationery, and legal expenses.
3. Annual Obligations:
   • Companies must file Annual Accounts with HMRC and Companies House, as well as a Confirmation Statement.
   • Even if an accountant handles these tasks, the director is ultimately responsible for ensuring they are completed accurately and on time.
4. IR35 Compliance:
   • If you provide contract services through an intermediary (your limited company), IR35 legislation may apply to certain assignments. Non-compliance can have serious financial consequences.
5. Short-Term Contracts:
   • Those seeking short-term contracts might find the limited company route less appealing due to the associated setup and administrative requirements.

In summary, while operating through a limited company offers significant tax and liability advantages, it also comes with increased administrative responsibilities and costs. Contractors need to weigh these factors against their individual circumstances and contract duration.