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Steps to becoming a limited company contractor

Published on Nov 3, 2009 |

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If you have decided to set up as a limited company contractor, there are a number of steps you will need to take before you're ready to start trading as a business.

If you hire a specialist accountant (the recommended thing to do), they will guide you through many of these steps, although choosing the right contractor accountancy firm is a task in itself!

1. Form a limited company

You can either set up a company directly via Companies House, use the services of a company formations agent (like Duport), or ask your accountant to do this on your behalf. The further down the chain you get from Companies House, the more you are likely to pay. We explore the limited company formation process in a dedicated guide here.

2. Open a bank account

Once you have formed your company, you will need to set up a business bank account. We recommend that you also open a separate savings account to put aside your tax liabilities. Most of the major banks are offering 2 year free banking deals currently, but don't expect to earn much interest on your savings!

3. Authorise your agent

The vast majority of limited company contractors will appoint an accountant to look after their affairs. You will need to submit Form 64-8 and return it to HMRC to complete this process - two copies if your accountant is going to take care of your personal tax affairs on your behalf.

4. VAT registration

If you expect to turnover in excess of the current registration limit, you are obliged to register for VAT. Most IT contractors register regardless, as your company may benefit from a more professional image if it has a VAT registration number. You can also benefit from reclaiming VAT on company purchases if you are registered. You accountant will be able to tell you if you are better off joining the flat rate VAT scheme, or the standard scheme.

5. Register for Corporation Tax

You should automatically receive a Corporation Tax 'welcome pack' from HMRC by virtue of having set up a new company. In the first instance, you should complete Form CT41G (which contains details about the new company), and return it to HMRC. Find out more in our guide to Corporation Tax

6. Set up your company payroll

You will also need to register your new company as an 'employer', enabling you to run a company payroll, deduct PAYE and national insurance contributions from all 'employees', including the director(s). Shortly afterwards, you should receive a New Employers Pack from HMRC providing further information.

Most contractors will have small PAYE and NIC liabilities, and will only need to make payments on a quarterly basis - although you may decide to pay yourself a salary which is below both PAYE and NIC thresholds. Read more in our popular guides to salary vs. dividends.

7. Further steps

Once you have completed your statutory and legal obligations as a new limited company contractor, you may want to take out business insurance (e.g. professional indemnity cover), or consider how best to protect yourself if you are unable to perform your contract duties (income protection), or if a contractor pension would be a beneficial way for your to limit your tax liabilities. You can find out more about these, and many other, services elsewhere on Contract Eye.