Going limited is one of the bigger decisions a contractor makes, and it is rarely a single step. Forming the company at Companies House takes minutes and £50, but the company on its own does nothing useful: it needs the right registrations, a business bank account, a clear plan for how you will pay yourself, and an honest read of your IR35 position before the first invoice goes out. This guide sets out the sequence in the order it actually happens, with the 2026/27 figures you will be working to.
The aim here is orientation: what to decide, in what order, and where the real money and risk sit. Several of the topics below (the salary and dividend split, your ongoing tax planning, choosing an accountant) deserve their own deep treatment, and we link to those rather than repeat them. If you want the firm to handle the setup and the running of the company for you, our contractor accountancy services are built around exactly this journey.
First decide whether a limited company is right for you
The most expensive mistake is incorporating before you have settled whether a company is the right vehicle at all. A limited company is not automatically better than the alternatives; it is better in specific circumstances, and worse in others.
A limited company gives you control over how and when you extract profit, the ability to retain earnings in the company across tax years, access to employer pension contributions as a tax-efficient extraction route, and a clean structure if you intend to build something beyond a single contract. It also carries running costs and a real compliance burden: annual accounts, a corporation tax return, payroll, possibly VAT, your own self assessment, and the IR35 judgement on every engagement.
The deciding factor for most contractors is their IR35 position. Where your work is genuinely outside IR35, the company route lets you plan extraction and usually leaves you better off after costs. Where your engagements are genuinely inside IR35, the income arrives already taxed and the tax-efficient salary and dividend planning is largely lost, so the simpler umbrella route is often the more economic answer. Many contractors who hold both inside and outside work keep a company for the outside engagements and use an umbrella for the inside ones. We cover that comparison in full in our guide to limited company versus umbrella for contractors; settle that question before you read on, because everything below assumes a company is the right call.
It also helps to be honest about your own appetite for administration. A limited company is a small business with real obligations: you are now a company director with legal duties, your filings have hard deadlines, and the consequences of missing them (penalties, a struck-off company, personal exposure on tax) are heavier than anything an employee or umbrella worker faces. None of this is difficult with the right support and a sensible routine, but it is work, and it is worth going in with eyes open rather than discovering the obligations after the fact.
Timing your move
There is rarely a need to rush incorporation. The company is most useful once you have, or are close to, an engagement to run through it, because a live company that is not trading still has to file a confirmation statement and (eventually) dormant or trading accounts. If you are weeks away from your first contract, incorporating now and getting the bank account and registrations in place is sensible. If you are merely exploring, you can hold off until the work is closer, and avoid carrying an idle company with filing obligations in the meantime. The exception is where a client or agency will only engage a limited company and wants the company details before they confirm; in that case, form it early and accept the modest admin of a short dormant period.
What a personal service company actually is
You will see your company described as a personal service company, or PSC. That is not a special legal form; it is simply the label for an ordinary limited company through which one individual supplies their own services, usually as sole director and principal worker. The term matters because the intermediaries legislation (IR35) and the off-payroll working rules are written around precisely this structure. Forming the company does not change the nature of the work you do; it changes who you contract through and how that income is taxed.
Choose your company name and structure
Before you incorporate you need a few decisions in place. Most are simple, but getting them right at formation saves admin later.
Company name. The name must be unique, must end in "Limited" or "Ltd", and must not be too similar to an existing registered name or use sensitive words without permission. Check availability on the Companies House register before you commit, and consider whether the matching domain and email are free if your brand matters to clients.
Registered office. Every company needs a registered office address in the UK, which appears on the public register and is where official post is sent. You can use your home address, but many contractors prefer an address service (often offered by accountants) to keep their home address off the public record. From 2024 onwards Companies House also requires an "appropriate address" where documents can be acknowledged, which rules out using a PO box alone.
Directors and shareholders. A private limited company needs at least one director (a real person aged 16 or over) and at least one shareholder; for most contractors these are the same person. You will decide the share structure at this point: a single contractor typically issues a small number of ordinary shares to themselves. If a spouse or partner will hold shares, take advice first, because the allocation of shares affects how dividends can be split and can raise settlements and associated-company questions later.
People with significant control. You must identify anyone who is a person with significant control (PSC in the Companies House sense, which is unrelated to the personal service company label), broadly anyone holding more than 25% of shares or voting rights. For a sole-director contractor company this is simply you.
Incorporate at Companies House
With those decisions made, incorporation is straightforward. You can apply directly through the Companies House online service for a fee of £50, and a standard application is usually processed within 24 hours, often the same working day. You provide the company name, registered office, director and shareholder details, the people-with-significant-control information, a statement of capital (the shares and their value), and the company's memorandum and articles of association (most contractors adopt the standard model articles).
On approval you receive a certificate of incorporation showing the company number and date of formation. The company now legally exists. You can incorporate yourself directly, or use a formation agent or accountant who folds incorporation into a wider setup package; the direct route is the cheapest, while a package can be convenient if you want bank account introductions, an address service and accounting all arranged together. Either way, the £50 fee is the only mandatory state cost to bring the company into being.
Two practical points often catch first-time directors. First, the SIC code: you select one or more Standard Industrial Classification codes describing what the company does. This is largely administrative, but pick a code that genuinely reflects your contracting activity rather than guessing. Second, your details become public. A director's name, the registered office, and the nature of the business appear on the open Companies House register, which is one reason an address service is popular. You can keep your residential address off the public record by supplying a separate service address, but the registered office must still be a real address where post can be received and acknowledged.
What you will need to hand
To complete the application smoothly, have ready the company name you have checked for availability, the registered office address and any separate service address, the director's and shareholders' personal details (name, date of birth, nationality, and identifying information such as part of a passport or National Insurance number), the share structure, and the people-with-significant-control information. Having these assembled beforehand turns incorporation into a ten-minute task rather than a stop-start one.
Register for the taxes that apply to you
A common misconception is that forming the company deals with tax. It does not. The company exists, but HMRC still needs to know about it, and several separate registrations may apply depending on what you do.
Corporation tax
Your company pays corporation tax on its profits, and you must register for it with HMRC within three months of the company starting to do business (which includes trading, advertising, renting premises or taking on staff). Registration is now closely tied to the incorporation process and HMRC will normally issue a Unique Taxpayer Reference shortly after the company forms. For the financial year beginning April 2026 the rates are a small profits rate of 19% on profits up to £50,000, a main rate of 25% on profits above £250,000, and marginal relief in between that produces an effective rate of about 26.5% on profits in that band. Those £50,000 and £250,000 limits are divided by the number of associated companies, so if you or a connected person control more than one company the bands shrink. Most single-contractor companies sit comfortably in the 19% band, but it is worth knowing where the steps are.
VAT
VAT registration becomes compulsory once your VAT-taxable turnover exceeds £90,000 in any rolling 12-month period, or you expect to exceed it in the next 30 days; the deregistration threshold is £88,000, and both have been frozen since 1 April 2024. Many contractors register voluntarily below the threshold, because they can recover input VAT on business costs and their clients (typically VAT-registered businesses) can reclaim the VAT they are charged, so charging VAT does not make you more expensive to them. There is also a Flat Rate Scheme available where expected taxable turnover is £150,000 or less, but for a typical labour-only contractor the limited-cost trader rule usually pushes you to a 16.5% flat rate that removes most of the benefit, so model it before opting in rather than assuming it helps.
PAYE
If the company will pay anyone a salary, including you as director, it needs to register as an employer for PAYE and run payroll, reporting pay and deductions to HMRC in real time. Even a modest director's salary normally means a PAYE scheme, so register before the first payment. Bear in mind the single-director point on National Insurance: the Employment Allowance, which offsets an employer's secondary Class 1 contributions, is not available to a company whose only employee is a single director, which is one reason sole-director contractors often set a low salary. The mechanics of the salary level belong with the extraction decision, covered below.
Open a business bank account
A limited company is a separate legal person, and its money is not yours to dip into freely. You need a dedicated business bank account so that company income and expenses are cleanly separated from your personal finances. This is not merely tidy: mixing personal and company money creates director's loan account problems, muddies your records, and makes accurate tax far harder.
Opening an account can take anywhere from a day to a couple of weeks depending on the provider's identity and anti-money-laundering checks, so start it as soon as the company is incorporated. Compare not just the monthly fee (many providers offer an introductory free period) but the integrations with accounting software, the ease of paying in and out, and any limits. Once the account is live, run every company transaction through it, pay yourself by formal salary and dividend rather than ad hoc transfers, and your year-end will be dramatically simpler.
The separation also protects you legally. The point of limited liability is that the company's debts are the company's, not yours, but that protection depends on respecting the company as a distinct entity. Routinely using company money for personal spending undermines that, and money taken out beyond your salary, dividends and legitimate expense reimbursements lands in your director's loan account. An overdrawn director's loan account that is still outstanding nine months and one day after the company's year-end triggers a tax charge on the company at 35.75% of the balance for loans made on or after 6 April 2026 (it tracks the dividend upper rate), refundable only once you repay the loan. A clean separation from day one is the simplest way to avoid that whole category of problem.
Set up your bookkeeping and records from day one
A company must keep accounting records that capture every transaction and show its financial position, maintain statutory registers, and file annual accounts and a confirmation statement at Companies House plus a corporation tax return with HMRC. If you register for VAT you keep VAT records and file returns through compatible software. None of this is optional, and the cost of reconstructing a year's records after the fact is far higher than keeping them as you go.
Choose cloud accounting software early and connect it to the business bank account so transactions flow in automatically. Capture receipts digitally as you incur costs, raise invoices through the software so your sales records are complete, and reconcile regularly. Good records are not just a compliance chore; they are what let you (or your accountant) make the planning decisions accurately, because you cannot plan a salary and dividend split, or a pension contribution, on numbers you do not trust.
Sort the insurance and contracts you will need
Two pieces of paper matter before your first day on a contract. The first is insurance. Most agencies and end clients require a contractor to hold professional indemnity cover, and often public liability and employers' liability as well; the exact requirements are usually written into the contract, so check what is mandated before you commit. The premiums are an allowable business expense paid through the company.
The second is the contract itself. As a limited company you are entering a business-to-business contract with the agency or end client, and its terms (alongside how the work is actually performed) feed directly into your IR35 position. It is worth having the written terms looked over before you sign, both for the commercial points (payment terms, notice, liability caps) and for the status indicators such as substitution, control and the absence of employee-style obligations. A clean contract does not by itself put you outside IR35, because the working practices have to match it, but a contract riddled with employment language makes a difficult position harder to defend.
Raise your first invoice and get paid
With the company formed, the bank account open and the contract signed, the first invoice is the moment the company starts trading, which is also the event that starts several tax clocks running. Invoice through your accounting software so the sale is recorded automatically, show the company name, number and registered office, your client's details, the work and the amount, and, if you are VAT-registered, your VAT number and the VAT charged. Agree payment terms in advance and chase promptly; cash flow is the practical day-to-day reality of running a company, particularly in the gap between your first invoice and your first payment.
Once money arrives in the company account, resist the urge to treat it as your salary. It is the company's income, out of which the company will pay corporation tax, your salary and any expenses, with the remaining post-tax profit available as dividends. Building the habit of leaving money in the company until it is formally drawn, and setting aside a sensible buffer for the corporation tax and VAT that will fall due, is what keeps a contractor company solvent and out of trouble at the year-end.
Understand the taxes you are stepping into
Once the company is running, your income comes out through a mix of salary and dividends, and the planning around that is where most of the value sits. This guide does not try to be the full extraction manual; it gives you the lie of the land so you know which decisions are coming.
Salary and dividends
A director typically takes a modest salary, which is a deductible company expense and can secure a qualifying National Insurance year, topped up with dividends paid from post-corporation-tax profit. Dividends carry no National Insurance but are taxed on you personally at the dividend rates, which rose on 6 April 2026 to 10.75% (ordinary), 35.75% (upper) and 39.35% (additional) for 2026/27, up from the 8.75% and 33.75% ordinary and upper rates that applied in 2025/26 and earlier. There is a £500 dividend allowance. The rise narrows the historic advantage of incorporating, which is exactly why the split is worth modelling rather than copied from a fixed figure.
There is no single optimal salary that fits every contractor: the right number depends on whether you can claim the Employment Allowance (a single-director company cannot), whether you have other income using your personal allowance, and your corporation tax marginal rate. We set out the framework in detail in our guide to the tax a contractor PSC pays, which is the right place to take the numbers further once your company is live.
Expenses and pensions
Costs incurred wholly and exclusively for the business reduce company profit and therefore corporation tax: accountancy fees, professional insurance, equipment, business travel (subject to the 24-month temporary workplace rule), and so on. The genuinely large lever, though, is an employer pension contribution from the company, which is deductible against corporation tax, carries no National Insurance, and is not taxed on you as income when paid in, within the annual allowance of £60,000 for 2026/27. For many contractors the pension is the single most efficient way to move money out of the company, and it is worth understanding early rather than as an afterthought near the year end.
IR35 and who decides your status
Forming a company does not change your IR35 position, and it does not let you self-determine status whenever you like. The rules look through the company at the substance of each engagement. Crucially, where your client is medium or large, the client assesses your status and issues a determination, and the fee-payer (usually the agency closest to you) operates PAYE before paying your company. You only self-assess under the original IR35 rules where the client is small or wholly overseas. This is the single biggest commercial variable for a contractor company, so it is worth reading our explainer on what IR35 is and how the two regimes differ, and if you want your contract and working practices reviewed before you sign, that is what our IR35 status and contract review service is for. A genuine company plus genuinely outside-IR35 working practices is the position you are aiming for; a company alone proves nothing.
Get the right support around you
You are not legally required to use an accountant, but most contractors do, because the compliance load is real and the planning decisions (the salary and dividend split, pension contributions, VAT choices, the IR35 judgement) reward specialist input that usually exceeds the fee. If you do appoint one, there is a structural point worth understanding: choose an accountant who clearly advises you and leaves the decisions in your hands, rather than one selling a packaged, standardised "company run for you" product where they influence or control your finances. The reason is the managed service company legislation, a separate regime from IR35 that can transfer unpaid tax as a personal debt and does not depend on any status test. Staying with an advice-based relationship keeps you clearly on the safe side of that line. Our guide on how to choose a contractor accountant goes into what to look for.
Different sectors also have their own quirks, from CIS in construction to offshore arrangements in oil and gas, so it is worth seeing how the setup applies to your field; our sector pages set out the specifics by contractor type.
A realistic timeline for going limited
Putting the pieces together, here is the order most contractors follow.
| Step | What happens | Typical timing |
|---|---|---|
| 1. Decide structure | Confirm a limited company beats umbrella for your IR35 mix | Before anything else |
| 2. Choose name and structure | Name, registered office, directors, shares, PSC details | Same day |
| 3. Incorporate | £50 online application at Companies House | Often same day, usually within 24 hours |
| 4. Open a business bank account | Identity and AML checks, account live | A few days to two weeks |
| 5. Register for taxes | Corporation tax (within 3 months of trading); VAT and PAYE if applicable | As they apply |
| 6. Set up bookkeeping | Cloud software linked to the bank, receipt capture | Before first invoice |
| 7. Appoint an accountant | Advice-based specialist support | Around formation |
The company number can be live within a day, but allow a couple of weeks end to end if you want the bank account, registrations and records all in place before your first invoice. The contractors who have the smoothest first year are the ones who treat formation as the start of a setup, not the finish line.
Common mistakes when setting up
A handful of errors recur often enough to be worth naming. Incorporating before settling the IR35 and structure question, then discovering the work is inside IR35 and a company adds cost without benefit. Mixing personal and company money, which creates director's loan account problems and messy records. Forgetting that the corporation tax registration and the company's filing deadlines start running from formation and trading, not from when you get round to them. Assuming the Flat Rate VAT Scheme helps without checking the limited-cost trader rule. And treating the company as proof of outside-IR35 status, when status turns on the substance of the engagement, not the structure. Each of these is avoidable with the right order of operations and a specialist looking over your shoulder.
Ready to go limited?
Setting up a limited company for contracting is a sequence of decisions: the structure choice, the incorporation, the registrations, the bank account, the records, and the planning around how you pay yourself, all sitting on top of an honest read of your IR35 position. Get the order right and the first year is calm; get it wrong and you spend it firefighting. If you would rather have a specialist handle the formation and run the company tax with you, our contractor accountancy services cover the whole journey, from incorporation to your first year-end and beyond.