The legislation states that where an individual provides their services to a client via a limited company, where the relationship between individual and the client would be one of employment but for the limited company, that limited company is liable for tax and social security contributions on earnings for the provision of services.
This means that the limited company must pay employer’s national insurance and deduct income tax and employee’s NI via the PAYE system on the entirety of the individual’s earnings from the provision of the services.
Normally those individuals will pay themselves from their limited company a level of salary, on which employer’s national insurance is paid. However, with significant amounts paid via dividends (on which lower tax rates and no national insurance contributions arise) the limited company structure gives often significant savings to the individual.
From 2020, it is proposed that individuals who provide their services to a client via a limited company will need to deduct tax and national insurance from payments in to limited companies. This is a significant change for business using the services of individuals who utilise limited companies in this way.