How to Set Up a Limited Company as a UK Contractor in 2026

Should You Set Up a Limited Company?

Setting up a limited company is the right move for most UK contractors who expect to be operating outside IR35, bill at a meaningful day rate, and plan to contract for more than a few months. But it is not the right choice for everyone, and it is worth spending five minutes on the decision before committing.

A limited company makes sense if:

• You expect to be outside IR35 for your engagements, or you have a mix of inside and outside contracts.
• Your day rate is £300/day or above — the tax savings typically outweigh accountancy and administration costs at this level.
• You plan to contract for at least 6–12 months — the setup overhead is not worth it for very short-term work.
• Your clients or agencies require a limited company to engage you.
• You want to build up retained profits in the company for future income smoothing or investment.

A limited company is probably not the right choice if all your work will be inside IR35, if you only plan to contract briefly before returning to employment, or if you are comfortable with the simplicity of an umbrella arrangement. In those cases, an umbrella company removes all administration while giving you legal employment status.

Step 1: Choose a Company Name

Your company name needs to be unique and follow Companies House naming rules. The name must end in "Limited" or "Ltd" and must not be too similar to an existing registered company. There are also restrictions on certain words — for example, words implying Royal patronage or regulated financial activities require special permission.

Practical tips for choosing your name

Most contractors use one of two naming conventions: their own name ("Smith Consulting Limited") or a trading name that reflects their specialism ("Apex Digital Solutions Ltd"). There are pros and cons to both. A personal name is professional and unambiguous, but a trading name can feel more credible to certain clients and gives you flexibility if your specialism changes.

Whatever name you choose, check availability before getting attached to it:

• Search the Companies House WebFiling name availability checker at find-and-update.company-information.service.gov.uk
• Check that the equivalent domain name is available if you intend to have a company website.
• Do a quick trademark search on the UK Intellectual Property Office website to avoid inadvertently infringing an existing mark.
• Google the name to check there are no established businesses trading under it.

Avoid names that are overly generic ("UK Consulting Ltd" type names are likely to be taken or confusingly similar to others), and avoid names that inadvertently make claims you cannot substantiate, such as "National", "International", or "British".

Step 2: Register with Companies House

Registering a company in the UK is straightforward and can be done online in under an hour. You have three options:

• Direct via Companies House (find-and-update.company-information.service.gov.uk) — costs £12 online and takes 24 hours or less.
• Via a formation agent — costs £20–£50 but many include a registered office address, printed certificates, and guided setup assistance.
• Via your contractor accountant — many accountants include company formation as part of their onboarding service, often at no extra charge.

What you will need to register

To incorporate your company you need to provide:

• Company name (your chosen and confirmed name).
• Registered office address — this must be a physical address in England, Wales, or Scotland (matching the company's country of registration). It will be publicly visible on the Companies House register. Many contractors use their accountant's address or a registered office service rather than their home address.
• Director details — your full name, date of birth, residential address (which is private but stored by Companies House), and nationality.
• Share structure — for a simple one-person contractor company, the standard setup is one class of ordinary shares with one share issued to yourself as sole shareholder. If you want to issue shares to a spouse for tax planning (to split dividends), this is typically done at formation — discuss with your accountant first.
• SIC code — the Standard Industrial Classification code that describes your business activity. Common codes for contractors include 62012 (Business and domestic software development), 70229 (Management consultancy), or 74909 (Other professional, scientific and technical activities).
• Articles of Association — for most contractor companies, the model articles provided by Companies House are perfectly adequate and require no customisation.

Step 3: Set Up a Business Bank Account

Once your company is incorporated, you need a dedicated business bank account. This is not just good practice — it is essential for clean bookkeeping and will be expected by your accountant and any professional body you deal with. Never mix company and personal funds in the same account.

What to look for in a contractor business bank account

The market for small business banking has improved significantly with the rise of challenger banks. Key criteria to evaluate:

• Monthly fee — traditional banks charge £5–£10/month; challenger banks (Tide, Starling, Mettle, Monzo Business) often offer free or very low-cost accounts.
• Accounting software integration — accounts that integrate directly with Xero, FreeAgent, or QuickBooks save significant time on bookkeeping.
• Application speed — challenger banks can open accounts in days; some traditional banks take weeks and require in-branch appointments.
• FSCS protection — ensure the account is covered by the Financial Services Compensation Scheme up to £85,000.
• International transfers — if you have overseas clients, check transfer fees and FX rates.

Popular choices among contractors in 2026 include Starling Business (free, excellent app, FSCS protected), Tide (free basic tier with good invoicing tools), and Mettle by NatWest (free, FreeAgent integration included). Traditional banks like Barclays, HSBC, and Lloyds remain options but are generally slower to open and more expensive.

Step 4: Find a Contractor Accountant

A good contractor accountant is arguably the most important professional relationship you will have as a limited company director. They handle your annual accounts, Corporation Tax return, Self Assessment, payroll, and VAT filings — and they provide ongoing advice on salary/dividend optimisation, expenses, and IR35.

What to expect from a contractor accountant

Typical monthly fees for a specialist contractor accountancy package in 2026 range from £80 to £150 per month (plus VAT). Most packages at this price point include:

• Annual statutory accounts and Corporation Tax return
• Personal Self Assessment tax return
• Payroll for your director's salary
• VAT returns (quarterly)
• Companies House confirmation statement
• Access to accounting software (FreeAgent or Xero)
• Unlimited email/phone advice

Fees above £150/month rarely add proportional value for a standard one-person contractor company. Fees below £80/month may be loss-leaders with hidden extras or poor service levels — check reviews carefully.

How to choose

Look for an accountant who specialises in contractors rather than a general practice that takes the occasional contractor client. Specialist firms understand IR35, the salary/dividend split, and HMRC's expectations of PSCs in a way that general accountants often do not. Ask specifically: how many contractor clients do they have? Do they provide IR35 contract reviews or refer you to a specialist? How quickly do they respond to queries?

Step 5: Register for Corporation Tax

Within three months of starting to trade, you must notify HMRC that your company is liable for Corporation Tax. "Starting to trade" means the date you begin any business activity — receiving income, signing contracts, or even incurring business expenses. This is a legal requirement and missing it can result in penalties.

Registration is done online through HMRC's "Register for Corporation Tax" service using your company's Unique Taxpayer Reference (UTR), which is issued automatically when Companies House notifies HMRC of your incorporation (usually within a few weeks). Your accountant will typically handle this registration as part of their onboarding process.

At the same time, you should also set up your company's PAYE scheme (see Step 6) and consider VAT registration (see Step 7) if your expected turnover requires it.

Step 6: Set Up Payroll

As a director paying yourself a salary, your company needs to be registered as an employer and operate a PAYE (Pay As You Earn) scheme. Even if your salary is below the income tax threshold, PAYE registration is required to make National Insurance contributions and to create the record of employment that protects your State Pension entitlement.

Your accountant will set up and run payroll as part of their standard package. The mechanics are straightforward for a one-director company: a monthly payroll is run, any PAYE income tax and employee NI are calculated, and the net salary is paid to your personal account. If your salary is at the optimal £9,100/year level, no income tax and no NI is due, but the payroll must still be submitted to HMRC every month via Real Time Information (RTI) reporting.

Employer NI and PAYE must be paid to HMRC by the 19th of each month following the payroll date (or 22nd for electronic payment). Even at a zero-liability level, the payroll submission itself must be made on time to avoid penalties.

Step 7: VAT — Do You Need to Register?

You are legally required to register for VAT if your company's VAT-taxable turnover exceeds £90,000 in any rolling 12-month period (the threshold effective from April 2024). At a £500/day rate and 200 working days per year, your turnover is £100,000 — above the threshold — meaning mandatory VAT registration applies from the point you exceed £90,000.

Voluntary VAT registration

Even below the threshold, you can register for VAT voluntarily. Reasons to do so include: reclaiming VAT on business purchases, and appearing more established to larger clients who may expect a VAT-registered supplier. The downside is the administrative burden of quarterly VAT returns.

The Flat Rate Scheme

The VAT Flat Rate Scheme (FRS) can be advantageous for some contractors. Instead of tracking the VAT on every individual transaction, you pay a fixed percentage of your gross (VAT-inclusive) turnover to HMRC. The percentage varies by sector — IT consultants, for example, pay around 14.5% under the FRS. The difference between the 20% VAT you charge clients and the FRS percentage you pay HMRC is yours to keep.

However, in 2026 the benefit of the FRS is modest for most contractors because of the "limited cost trader" rules introduced in 2017: if your VAT-inclusive purchases are less than 2% of your VAT-inclusive turnover (or less than £1,000 per year), you must use the limited cost trader rate of 16.5%. This eliminates most of the FRS advantage for service-based contractors who have few purchases. Discuss the FRS with your accountant — the maths need to be run for your specific situation.

Step 8: Professional Insurances

Before you start billing clients, you need the right professional insurances in place. Operating without them can leave you personally exposed to claims running into tens of thousands of pounds, and many clients will not engage you without sight of a current certificate of insurance.

Professional Indemnity Insurance (PI)

Professional Indemnity insurance covers you against claims that your professional advice or work caused a client financial loss. It is the most important cover for knowledge workers — IT contractors, consultants, engineers, and finance professionals. Most contracts will require evidence of PI insurance, typically with minimum cover of £1–£2 million. Annual premiums for contractors typically range from £200 to £600 depending on your sector and the level of cover required.

Public Liability Insurance

Public Liability covers claims for injury or property damage caused to third parties in connection with your business activities. If you visit client sites — which most contractors do — this cover is usually required. Premiums are generally modest: £100–£250/year for £1–£2 million cover.

IR35 Investigation Insurance

If you are operating outside IR35, HMRC investigation insurance covers the professional costs of defending a tax enquiry. Specialist providers (Qdos, Kingsbridge) offer policies from around £100–£200/year. This is not a substitute for proper IR35 compliance, but the peace of mind and cost protection it provides is well worth the relatively small premium.

Employers Liability Insurance

Employers Liability is a legal requirement if you have any employees, including people other than yourself. If it is genuinely just you in the company, you are exempt. However, if you intend to employ others or take on subcontractors on an employed basis, you need this cover in place before their first day of work.

Ongoing Obligations

Once your company is set up and trading, there are several recurring obligations you need to stay on top of every year. Most are handled by your accountant, but as a director you remain personally responsible and can face personal liability for failures.

Annual accounts

Your accountant prepares your company's annual statutory accounts each year. These must be filed at Companies House within nine months of your accounting year end. For example, if your company's year end is 31 March, accounts are due at Companies House by 31 December. The accounts must also be submitted to HMRC alongside your Corporation Tax return (CT600).

Confirmation statement

Every year, you must file a confirmation statement at Companies House (previously called an annual return). This confirms that the information held on the public register is correct — directors, shareholders, registered address, and SIC code. The fee is £34 per year if filed online, and it is due on the anniversary of your company's incorporation. Failure to file can ultimately lead to your company being struck off the register.

Personal Self Assessment

As a director and shareholder receiving dividends, you must file a personal Self Assessment tax return each year. The deadline for online filing and payment of any tax due is 31 January following the end of the tax year. Dividends above the £500 allowance are declared here, and any higher-rate tax on dividends is paid through Self Assessment. Your accountant prepares and files this on your behalf as part of a standard package.

PAYE and NI payments

Any PAYE income tax and National Insurance deducted from your director's salary must be paid to HMRC by the 19th of each month. If your salary is at the optimal low level, the liability may be zero — but the RTI payroll submission must still be made monthly.