Setting up a limited company is often viewed as the next step in a contractor’s career. If you’ve spent years with an umbrella, you might start feeling that the time is right to take on additional responsibility – and reap the financial reward this will bring.
But how do you go about forming a limited company? We’ve created this handy guide that outlines what you need to do.
Name your company
The first thing you’ll need to think about is what you want to call your business. This is often considered to be the most fun part of the incorporation process, as you can get your creative juices flowing and dream up something original. But before you jump in head first, there are a few things to consider.
Your name can’t constitute a criminal offence, be offensive, contain sensitive words or expressions, or be the same as a business already in existence. It also can’t confuse, deceive or mislead the public into thinking it’s something it’s not. If your name falls foul of any of these rules, it won’t be accepted by the Registrar of Companies.
There are a number of resources you can use to check if your name is suitable. The first is a list of words you’ll need permission from Companies House before you use, while you can also look at their WebCHeck service to see if your chosen name has been used elsewhere.
Most contractors choose to name their company after themselves to make it easily identifiable. While there’s nothing wrong with that, you might want to think of something different that will stand out from the crowd. Just don’t forget that as a private company, your name must end with ‘Limited’ or ‘Ltd’.
Even if your chosen name passes the initial checks, it could still be challenged later down the line. This can happen for a number of reasons, such as if another business thinks your name is too similar to its own. If you want to avoid going back to the drawing board, you’ll need to do thorough research from the outset and choose something that will be same for the long term.
Incorporate your company
Once you’ve settled on your name, the next step is to set up your business with Companies House. It might be worth doing this through a specialist contractor accountant, such as ourselves, to make sure you receive all the additional support you’ll need as a first-time director.
When registering your company, you’ll need to submit the following documents to Companies House:
- Form IN01 – This contains details such as your company name, operating address, proposed directors, shareholders and their share capital
- Memorandum of Association – This declares the names and signatures of all company shareholders
- Article of Association – These are the rules that govern your company
Once all this has been submitted and accepted, you’ll be issued with a Certificate of Incorporation. This includes your registration number and date of incorporation. You’ll need this document to open a business bank account, apply for a loan, sell shares to new investors, or if you decide to sell your company.
Open a business bank account
Since your personal and business finances are kept separate, you’ll need to open a business bank account. This will receive all incoming payments from agencies and clients, and make outgoing payments like salary, dividends, business purchases and expenses.
Register for VAT
As a limited company contractor, you’ll need to register for VAT once your annual turnover reaches £85,000. However, most people do this voluntarily long before they get to this amount.
If your income falls below £150,000, you can register for the flat-rate VAT scheme. Instead of paying the full 20% on all your transactions, you’ll be charged a fixed percentage based on your gross turnover. This percentage will vary from sector to sector.
New businesses will receive an additional 1% reduction in their first year of trading, which is taken off automatically until the anniversary of the company’s registration.
When deciding which VAT scheme is best for you, it’s a good idea to think about the number of business purchase you make. Those with a large amount would be better off on the standard rate. If you’re unsure, we’ll be able to help.
Once you’re all set up, you’ll need to complete a VAT return every quarter and send payment to HMRC.
For more information on VAT as a limited company, take a look at our VAT guide.
Register as an employer
Even if you’re the only director of the company, you’ll still need to register your business as an employer with HMRC. That’s because you need to be classed as an employee in order to receive a salary.
Most contractors pay themselves an annual salary below the income tax and National Insurance threshold – meaning they won’t need to pay anything to HMRC.
If additional payments are needed, here are the figures you’ll need to know:
- Income tax
|Annual earnings in 2020/21||Income tax charged|
|Up to £12,500||0%|
|£12,500 to £37,500||20%|
|£37,501 to £150,000||40%|
- Dividend tax
|Dividend income||Tax rate charged|
|Up to £2,000||0%|
|£2,001 to £37,500||7.5%|
|£37,501 to £150,000||32.5%|
For more information about dividend tax, please see our guide.
- National Insurance Contributions
As a limited company contractor, you’ll need to pay both employer and employee National Insurance above a certain threshold. The currents rates are:
|Annual earnings 2019/20||Tax rate charged|
|Annual earnings 2020/21||Tax rate charged|
|Below £183 per week||0%|
|Between £183 and £962 per week||12%|
|Above £962 per week||2%|