Setting up a limited company for UK contracting

Should you use a Ltd at all?

For an outside-IR35 contractor on £400+/day with engagements longer than 3-6 months, a Ltd company nets ~£3,000-£5,000 more per year than umbrella, even after accountancy fees. Below £400/day or for short engagements (under 3 months), the Ltd advantage shrinks and the admin overhead can tip the balance toward umbrella.

For inside-IR35 contracts, a Ltd is almost never the right answer, you'd be operating deemed-payment PAYE on the engagement (full income tax + NI on the deemed payment) and keeping the admin overhead. Umbrella is cleaner and cheaper.

Run your specific numbers through the umbrella vs Ltd calculator before deciding, and check the inside-vs-outside IR35 comparison for the qualitative tradeoffs that the calculator doesn't quantify.

Before you start: 5 decisions

Five non-obvious decisions to get right BEFORE you click “incorporate”, because changing them later is either expensive or impossible.

1. Company name

Most contractors use “[Surname] Consulting Ltd”, “[Surname] Solutions Ltd”, or “[Initials] Ltd”. Avoid anything that names a specific client or current technology, “Acme Consulting Ltd” or “React Specialists Ltd” ages badly. Avoid “Ltd” in the common-noun sense (“Software Ltd”) because it's likely already registered. Search availability at find-and-update.company-information.service.gov.uk.

2. Registered address

Either your home (free, but appears on the public Companies House record forever) or a registered office service (£30-£50/year, keeps your home address private, handles HMRC mail). Most contractors who plan to keep contracting long-term use a registered-office service. You can change this later but each change creates a permanent record on Companies House.

3. Shareholders

Sole director / sole shareholder is the simplest setup and works for most contractors. If you have a spouse or partner with unused personal allowance and basic-rate band, adding them as a 50% (or 60/40) shareholder lets you split dividends, savings of £2,000-£5,000/year of dividend tax for typical contractors. The catch is the settlements legislation: shares must be ordinary shares with full rights, not artificially-restricted “B shares”. Adding a shareholder later is a share-transfer transaction and may trigger CGT. Easier to set this up correctly at incorporation.

4. Accounting year-end

Companies House defaults to the last day of the month you incorporated in. Most contractor accountants prefer 31 Marchfor alignment with the personal tax year (5 April), which simplifies dividend planning and self-assessment. You can change the year-end ONCE for free; subsequent changes need a director's resolution. Set it correctly at incorporation if possible.

5. SIC code

Standard Industrial Classification, Companies House asks for one or more codes describing your trade. Most software contractors use 62012 (Business and domestic software development) or 62020 (Information technology consultancy activities). Pick the one closest to your actual trade — doesn't affect tax but appears on the public record and is used for statistics.

Step 1

Incorporate at Companies House

Register the company online at gov.uk/limited-company-formation. £50 fee, same-day approval usually. Pick a unique name, register an address (your home address works but appears on the public Companies House record forever, many contractors use a registered-office service for ~£40/year to keep their home address private), name yourself sole director and sole shareholder.

Step 2

Open a business bank account

Tide, Starling, Mettle, or Wise Business open in 24-48 hours and are free or near-free for low transaction volume. Traditional banks (HSBC, Barclays) take 2-4 weeks but have stronger lending relationships if you'll need a Ltd-business mortgage or loan later. For most contractors the digital banks are fine.

Step 3

Engage a contractor specialist accountant

Crunch (£99/month all-in), FreeAgent (£35/month software + £40-60/month bookkeeping addon), Inniaccounts, SJD Accountancy. Specialist contractor accountants run payroll, file your CT return, file your annual accounts, file your confirmation statement, and handle your self-assessment for around £100/month. Cheaper if you DIY the bookkeeping.

Step 4

Register for corporation tax

HMRC automatically sends a registration request within 3 months of incorporation. You log in, set your accounting year-end, and you're registered. Your accountant will handle this if you've engaged one.

Step 5

Decide on VAT registration

Compulsory above £90,000 of annual turnover (April 2024 threshold; check current threshold for your tax year). Voluntary below, pros (you can reclaim VAT on equipment / software / accountancy fees, and the Flat Rate Scheme adds 1-2% retention for IT contractors at the 14.5% sector rate); cons (extra admin, VAT-inclusive day rates make you uncompetitive vs sole traders if your client can't reclaim VAT).

Step 6

Buy professional indemnity + IR35 insurance

Professional indemnity from Hiscox or Markel (£200-£400/year) covers you against claims from a client. IR35 insurance from Kingsbridge, Qdos, or IR35 Shield (£200-£500/year) covers investigation costs and the tax bill itself. Public liability insurance (£100/year) covers physical damage at client sites, only needed if you visit them. Most agencies require all three before you can start an engagement.

Step 7

Set up payroll for your director salary

Decide on your director salary (£12,570 is the standard optimal, see our salary-vs-dividend split optimiser). Register as an employer with HMRC (your accountant does this). Run payroll monthly using your accountant's payroll software (or FreeAgent / Crunch handle it automatically). The £12,570 splits as £1,047.50/month, predictable, simple, and the optimal point for most contractors.

Realistic timeline + total setup cost

Ongoing monthly rhythm

Once set up, the monthly cycle is short, call it 1-3 hours/month if you have an accountant doing the statutory filings, 5-10 hours/month if you're DIYing.

• Weekly: Raise invoices to the agency (5 mins/wk).
• Monthly: Reconcile your business bank account in your accounting software (~30 min); run payroll for the director salary (~5 min via accountant); declare any dividends drawn (~10 min).
• Quarterly (if VAT-registered): File VAT return, usually automatic via accountant or FreeAgent / Crunch.
• Annually: File annual accounts (CT600 return + abbreviated accounts at Companies House) — accountant handles. File personal self-assessment by 31 January. File confirmation statement at Companies House (£13 fee, annually).

Common pitfalls

• Mixing personal and business expenses. Don't buy groceries on the company card. HMRC treats personal use of company funds as either a taxable benefit-in-kind or an illegal director's loan. Get a separate business card from day one and keep transactions clean.
• Taking dividends without distributable profit. Illegal, see the FAQ. Run a quarterly P&L before each dividend declaration, or use FreeAgent / Crunch which auto-checks.
• Forgetting the confirmation statement. Annual £13 filing at Companies House. Easy to miss because it's not a tax deadline. Late filings get the company struck off, re-instatement is expensive.
• Closing the company before extracting cash. Strike-off costs £33 but only works for companies with under £25k in assets. Above that you need an MVL (£1,500-£3,000 liquidator fee). Plan the wind-down several months ahead.
• Skipping the business bank account. You'll lose track of expenses and your accountant will charge extra for reconstruction. Open a business account on day 1, even if you don't use it immediately.
• Underestimating IR35 risk. Even on outside engagements, get IR35 insurance (£200-£500/yr) and a specialist contract review (£200) for any engagement worth £30k+. The expected cost of investigation without insurance dominates the premium.

Frequently asked questions

Can I set up the Ltd while still permanently employed?

Yes, but check your employment contract for any non-compete or 'second job' clause. Most permanent contracts allow side activities as long as they don't compete with your employer. Set up the Ltd in advance (incorporation, bank account, accountant) so you're ready to invoice on day one of contracting; don't wait until your perm notice period ends. The Ltd just sits dormant until you have your first invoice, no cost beyond the registered office service.

Should my spouse be a shareholder?

Maybe, depends on whether they have unused personal allowance and basic-rate band. If your spouse earns less than ~£50,000 and would otherwise have spare basic-rate capacity, splitting dividends 60/40 or 50/50 can save £2,000-£5,000/year of dividend tax. The catch is the settlements legislation (s.660 ITTOIA): the income has to be 'unfettered', your spouse must own genuine shares with full rights, not 'B shares' that can have dividends switched on and off. Most contractor accountants set this up correctly with ordinary shares; ask before incorporating because adding a shareholder later is more complex.

What year-end should I pick?

March 31 is the most common contractor choice. It aligns with the personal tax year (5 April), so corporation tax filings, dividend planning, and self-assessment all use the same income period. Companies House defaults to the last day of the month you incorporated in (e.g., incorporated 14 March → year-end 31 March automatically), but you can change it once if needed. Some accountants prefer December year-end because it gives them a workload trough in spring; others prefer March for the alignment. Neither is wrong; pick whichever your accountant prefers if you have one.

Do I need a registered office service or use my home address?

Personal preference. Using your home address is free but it appears on the public Companies House record permanently, so anyone can look up your address. Registered office services (1stFormations, Made Simple, your accountant) cost £30-£50/year and give you a UK business address that handles any HMRC / Companies House mail. Most contractors who plan to keep contracting long-term use a registered office service. Note: this is the company's REGISTERED address, not necessarily your trading address. They can be different.

What happens if I take dividends before there's distributable profit?

Illegal. Dividends can only be paid out of post-corporation-tax profit. Taking them earlier means HMRC reclassifies them as either salary (full PAYE + NI due) or a director's loan (subject to s.455 corporation tax at 33.75% if outstanding more than 9 months after year-end). Your accountant manages this by running quarterly profit-and-loss statements before declaring each dividend. If you DIY without an accountant, do the maths carefully. Getting it wrong is one of the more common ways contractors end up with surprise tax bills.

Should I register for VAT voluntarily below the £90k threshold?

Three considerations. (1) If your clients are VAT-registered businesses, registering doesn't cost them anything (they reclaim the VAT) and lets you reclaim VAT on your own purchases, clear win. (2) If you'll cross the £90k threshold within the year, voluntary registration earlier saves the admin disruption of mid-year registration. (3) Flat Rate Scheme at 14.5% (IT contractor sector rate) plus the 1pp first-year discount adds 1-2% to your retention vs standard VAT, small but real. Net answer: most contractor Ltds with B2B clients should voluntarily VAT-register on day one even below the threshold.

Can I dissolve the Ltd if contracting doesn't work out?

Yes. Two options: (1) Strike-off, if the company has been dormant for 3+ months, has no debts, and total assets under £25k, you can apply to be struck off Companies House register for a £33 fee. Any remaining cash is treated as a final dividend (if it's been distributed) or a capital distribution (CGT-treated, often at 10% with Business Asset Disposal Relief if eligible). (2) Members' Voluntary Liquidation (MVL), for solvent companies with assets over £25k. Liquidator fee £1,500-£3,000; cash extracted is taxed as capital gains. MVL is worth it if you have £20,000+ of retained earnings to extract because the CGT rate is much lower than dividend rate.

What's the realistic total cost in year one?

Roughly £1,800-£2,500 in year one. Breakdown: incorporation £50 + registered office £40 + accountant £1,200 (£100/month × 12) + PI insurance £300 + IR35 insurance £350 + public liability £100 + business bank fees £0-£100 + payroll software £0 (usually included in accountancy package) + miscellaneous £100. From year two onwards expect ~£1,900/year. The accountant fee is by far the biggest line, DIY accounting can drop the cost to ~£800/year if you're confident with bookkeeping and CT returns.