Setting up a Limited Company for Contracting in the UK

Remay Villaester (May)

If you’re a contractor setting up a new business, one of the first things to do is choose the right business structure. For many contractors, the most efficient and cost-effective is a limited company. This gives you full control of your finances, but is also a tax-efficient solution.

In this guide, we’ll cover everything you need to know about setting up a limited company for contracting in the UK. We’ll look at the advantages of using this business structure as a contractor, plus the costs involved and how to get started.

We’ll also touch on how to manage your finances as a contractor, such as using Wise for Business to save money on international transactions.

Benefits of setting up a limited company when contracting

The most obvious business structure to choose as a contractor is a sole trader, where you work for yourself as a freelancer and have quite straightforward tax and accounting arrangements. You could also choose to work under an umbrella company.

But do a little more research and you could find that running your own limited company is a better option. Here are just a few of the main advantages:¹

It’s more tax efficient

As the director of a limited company, you take a small salary and get the rest of your income by withdrawing dividends from the business. This means only a small amount of PAYE and National Insurance Contributions (NICs) to pay on your salary, and no NICS due on company dividends.

You control the way you get paid

As well as being in complete control of the running of the business, you’re also in charge of financial matters as the director of your own limited company. You can set everything up just the way you like it, including choosing how you’d prefer to get paid.

You can even choose to sell your limited company, as it’s a legal entity in its own right.

Further benefits include:

  • Limiting your personal liability for the business, just in case things go wrong
  • You can create different classes of shares for the business - this can be useful if you want to attract investors or divide ownership between a number of people
  • Giving your company a highly professional image, which could be useful if you have other business interests.

Drawbacks to using a limited company for contracting

As with any key business decision, there are of course cons as well as pros when using a limited company for contracting. Here are just a few to consider:

  • You’ll have a lot more admin to deal with, compared to working via an umbrella company - although a good accountant can be a huge help
  • There are costs involved in running a limited company (we’ll cover those in just a moment)
  • You will be ultimately responsible as company director for preparing annual and other accounts accurately and on time
  • If you’re looking to take on short-term contracts, a limited company may not be the best business structure
  • IR35 legislation may apply, meaning you’ll need to follow additional rules.

What is IR35?²

Another consideration when setting up a limited company for contracting in the UK relates to IR35. These are new rules aimed at clamping down on ‘disguised employment’, where contractors are providing services to clients via their own limited company - even though they are essentially an employee in everything but name.

The IR35 change inevitably affects contractors with their own limited companies. It could mean that you need to pay more income tax and NICs on your income, and there are also high financial penalties if you don’t follow the rules.

That being said, limited company contractors may also be able to use the 5% expenses allowance and join the flat rate VAT scheme to reduce IR35-related costs.

Cost of setting up a limited company

Registering a limited company in the UK is pretty cheap, with an application fee of just £12 to pay if you register online. Do it by post and you’ll pay a fee of £40³.

Once your new company is official, you’ll also need to cover all the associated costs of running the business. This includes:

  • Accountancy fees
  • Legal and administration fees
  • Filing an annual confirmation statement to Companies House - this costs £13 for online filing or £40 via post⁴.

Do I need a dedicated limited company bank account?

Your new limited company will need its own dedicated bank account, but the good news is that you should be able to choose from a wide range of everyday business bank accounts.

When applying for a business bank account, you’ll need to provide your Certificate of Incorporation, along with proof of identity, address and trading address. You may also need details of signatories.

Some banks may ask you for more information on your expected revenue and income, number of employees and your plans for the future of your business.

How to open a limited company in the UK - first steps

The first thing to do is to head to the Government’s website, where you’ll find lots of information on registering and running a limited company. This includes the paperwork and details you’ll need, the fees involved, and the online form to register your new company.

Before you use the online registration form, you’ll need to create a new Government Gateway account just for your company.

You can also download a registration form and send it in via post, or register a limited company using an agent, accountant or third-party software.

Manage your company finances with Wise for Business

If you plan to provide contractor services to international clients, one of the next steps after registering your limited company is to find a cost-effective solution for global transactions. After all, sending and receiving money internationally using your bank can be expensive.

Enter Wise. Open a Wise for Business account online in minutes, and you’ll soon have a low-fee way to pay overseas suppliers and get paid for your work. Better still, all international transfers are carried out at the real, mid-market exchange rate.

You can pay invoices in 70+ currencies, and spend online and worldwide with no foreign transaction fees using your linked Wise debit Mastercard. You can even save yourself some accountancy fees and integrate your Wise account with software like Xero and Quickbooks.

Besides all that our company formation solution will let you form a new limited company run by a sole shareholder and get a Wise Business account in one go.

Start saving today with Wise

After reading this guide, you should have a better idea of what’s involved in setting up a limited company for contracting in the UK - and if it’s the right arrangement for you.

The very best of luck with your new business!

Sources used for this article:

  1. Contracteye blog post - limited company
  2. Contracteye blog post - financial impact
  3. - LLC registration
  4. - LLC annual return

Sources checked on 31-February-2021.

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from Wise Payments Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.

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