Professional contractors and other small businesses frequently use the limited company structure. In this guide, we examine the practicalities of how to set up a company for contracting.
Why use a limited company as a contractor?
Legal requirements of limited companies
Information required to set up a limited company
Different ways to set up your company
What happens next? Next steps
Why use a limited company as a contractor?
As the term would suggest, the financial liability of limited company directors is limited. Your personal finances are separate from the company’s (unlike the sole trader business structure).
Although limited liability companies’ shareholders are not responsible for company debts, directors may occasionally be required to guarantee loans or credit granted to the company.
You have more tax planning opportunities as a limited company director than a traditional employee. However, the tax gap between directors and employees has reduced significantly over the past decade.
The directors are responsible for submitting the company Confirmation Statement to Companies House. This provides a ‘snapshot’ of the company’s details at a moment in time. You must submit this form within 28 days of your ‘made up date’ (£34). This is typically the date of incorporation. It can be updated at any time throughout the year – with no extra charge.
Each company must file a Corporation Tax return (CT600) each year, and pay any due liabilities within 9 months and 1 day of the year end.
The company must deduct income tax and National Insurance Contributions from all employees on behalf of HMRC, via the Pay As You Earn (PAYE) scheme.
Anyone employed by the company must pay income tax and national insurance on their income.
Following the implementation of the Companies Act 2006, companies are no longer obliged to appoint a company secretary. A sole director can run a limited company.
Information required to set up a limited company
To successfully incorporate a limited company in the UK, you must submit three documents to Companies House. In reality, all of this information can be submitted online without the need for any ‘paperwork’.
1. Form IN01
This is the formal application form, which includes your registered office address, details of all company officers (directors/company secretary if needed), details of share capital and classes of shares issued.
Before you fill in this form, you must first check that your desired company name is available and that it doesn’t fall foul of the rules governing ‘sensitive’ words or expressions. Read more about naming your company.
2. Articles of Association
A document that acts as the company’s ‘constitution’ sets out how it is to be run. On 1st October 2009, new ‘model’ articles were introduced as part of the Companies Act 2006 rollout.
These model articles are used as standard unless you choose to provide your custom Articles.
3. Memorandum of Association
This contains a statement by each subscriber confirming their intention to form (and become a member) of the company.
When you incorporate online, the Memorandum is automatically created using the information you submit about the company’s initial shareholders.
If you incorporate directly via the Companies House Web Incorporation Service, you can submit all the required information online, without needing any forms, for a mere £50.
Use a formation agent
An intermediary is likely to charge more (for obvious reasons), or they will offer you a company for a very competitive price, and make their money from add-ons, such as bank account services.
Use an accountant for peace of mind
Although you can form a company directly through Companies House or a formation agent, many contractors prefer to incorporate through a company formation agent or an accountant.
Most contractor accountants will happily set up a company on your behalf (sometimes at no extra cost if you sign up to use their services).
This is a popular option for contractors, as there are several other administrative tax-related tasks to attend to as a new company owner. These tasks can be undertaken simultaneously if your accountant also forms your company.
Once your company has been successfully incorporated, you will be sent a Certificate of Incorporation, which you should keep in a safe place.
These are the typical steps for a new limited company director. Don’t forget, if you appoint an accountant, they will deal with all of the tax and administrative tasks on your behalf.
Set up a business bank account – a limited company is a distinct legal entity, so you need a separate account.
Authorise your agent – this lets HMRC know you’ve appointed an accountant to look after your affairs.
Register for VAT – most contractor companies are registered for VAT, even if they don’t meet the £90,000 registration threshold.
Register for Corporation Tax – the tax on company profits. Find out more in our guide to Corporation Tax.
Register as an ’employer’ – this will enable you to run a company payroll, and deduct PAYE and NICs from all employees.
Decide on your salary/dividend split – How will you pay yourself? Read more in our popular guide to salary vs. dividends.
Visit our incorporation partner, 1st Formations, for more helpful guidance or to set up a company limited by shares online. Prices start at just £52.99, which includes the Companies House filing fee of £50.00.
