How to set up a limited company for contracting

Setting up a limited company is a common step for contractors who want greater control over how they work and the way they are paid. While the process is relatively straightforward, it involves important decisions and legal requirements, from choosing a company name and registering with Companies House to understanding your tax responsibilities. 

Continue reading our article below, created in collaboration with Markel Tax, to learn more about how to set up a limited company for contracting, including what is required and what to consider at each stage, such as IR35 status. 

How to set up a limited company 

1. Choose a company name 

The first step in setting up a limited company for contracting is choosing a company name. Your chosen name must be unique and not too similar to an existing company registered with Companies House. The name will also need to end with “Limited” or “Ltd”, and must avoid restricted or sensitive words unless you have received official permission to use them. 

Some contractors may choose to opt for a neutral or professional name, rather than trading under their own name, which can help the business feel more flexible if contracting focuses change over time. 

2. Appoint directors 

Every limited company must have at least one director, which is responsible for managing the company and ensuring it complies with legal and tax requirements. An article from ContractorUK, home to the UK’s IT contracting community, advises that if you want to pay yourself in the most tax-efficient way, then you can appoint yourself as a director when registering your company. 

3. Set up the share structure 

You will need to decide how the company’s shares are structured before registration – GOV.UK informs that you will need at least one shareholder, who can be a director. As a contractor, you are able to issue a single ordinary share to yourself to keep ownership clear and administration straightforward. More complex share arrangements are also possible but often require professional advice to ensure they are set up correctly and do not create any tax or compliance issues in the future. 

4. Register the company with Companies House 

Once these decisions have been made, the company can be registered with Companies House. This can be done directly online, through an accountant, or through a company formation agent, such as 1st Formations. During registration, you are required to provide details of the directors and shareholders, confirm the registered office address, and select a Standard Industrial Classification (SIC) code that describes the nature of your business activities. 

Once the application is approved you should receive a Certificate of Incorporation, which confirms that your limited company legally exists and can begin trading. 

5. Register for tax with HMRC 

After incorporation, the company must be registered for Corporation Tax with HMRC. You are typically able to do this online and must complete it within three months of the company starting to trade. 

The company will now be required to file Corporation Tax returns, submit annual accounts, and pay any tax due within the relevant deadlines. Taking the time to understand these obligations early on can help you to stay compliant and avoid any potential penalties. 

6. Open a business bank account 

A limited company must operate through its own business bank account, separate from personal finances. This is essential for demonstrating that the company is a distinct legal entity and for keeping financial records clear and accurate. 

Having a dedicated account can also offer a range of benefits, such as making accounting and tax reporting significantly easier. 

7. Manage accounts and ongoing compliance 

Once trading begins, you will be responsible for maintaining accurate financial records, filing annual accounts with Companies House, and submitting confirmation statements that keep your company details up to date. 

Many contractors choose to work with an accountant who specialises in contractor businesses as this can help ensure filings are completed correctly, deadlines are met, and the company remains compliant with tax and employment legislation. 

8. Understand insurance requirements 

After you have set up your limited company, it is important to consider the risks your business may face. 

Many clients require contractors to hold specific types of insurance before work can begin, such as professional indemnity cover. When securing insurance is not contractually required, having protection in place can still be beneficial to safeguard your business against claims, disputes, or unforeseen events that could otherwise have a significant financial impact on your company. 

If your business employs people on a full or part-time basis, employers’ liability insurance is a legal requirement. 

9. Review contracts and IR35 considerations 

Before starting your first contract, it is important to review the terms carefully and understand where responsibility lies. For contractors, this includes assessing whether the engagement falls inside or outside IR35 and ensuring that your working practices reflect what is written in the contract. 

Taking the time to address these issues can help protect both you and your company over the longer term. 

To understand how IR35 works in relation to contractors working through a limited company, visit our informative article, or learn more about IR35 here. 

Frequently asked questions about setting up a limited company  

Why do contractors set up limited companies? 

Many contractors choose to operate through a limited company because it provides limited liability, a more professional business image, and greater control over how and when income is taken. Clients and agencies also often prefer engaging with limited companies rather than individuals. 

What is a Personal Service Company (PSC)? 

A Personal Service Company (PSC) is a limited company typically set up by a contractor where the contractor is the main director and shareholder. It is the most common business structure used by contractors providing services to clients on a contract basis. 

Does setting up a limited company protect me under IR35? 

Setting up a limited company does not remove IR35 risk on its own, as IR35 status depends on the terms of the contract and the reality of the working arrangement. However, operating through your own company can help demonstrate that you are genuinely in business, provided your contracts and working practices support this. 

How do contractors pay themselves through a limited company? 

Contractors usually pay themselves through a combination of salary and dividends. Salary is subject to PAYE and National Insurance, while dividends are paid from company profits after Corporation Tax. The right approach will depend on individual circumstances and should be reviewed regularly. 

Do contractors need business insurance when setting up a limited company? 

Yes, contractors are typically required to have business insurance before they start trading. This may include professional indemnity insurance, public liability insurance, and employers’ liability insurance. 

Can a contractor claim business expenses through a limited company? 

A limited company can claim certain allowable business expenses, which may include professional fees, software, equipment, and insurance premiums, subject to HMRC rules and requirements. 

Do I need a separate bank account for my limited company? 

Yes, a limited company must have its own business bank account. Keeping company finances separate from personal finances is a legal and practical requirement, and helps maintain clear records. 

Discover our knowledge centre for more help and guidance or read more about Caunce O’Hara’s contractor insurance. 

Please note: This article provides guidance for information purposes only and is accurate at the time of production. It should not be relied upon wholly when making or taking important business decisions – always seek the services of an appropriately qualified professional. The views expressed by websites referenced to are limited to those of the websites, and do not necessarily reflect the views of Caunce O’Hara. Caunce O’Hara is not affiliated with any of the brands, companies or websites mentioned in this article.