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How to set up a ltd. company as a contractor

There are several steps to setting up a limited company. You can either choose to do it all yourself or hire an accountant to do it for you. It broadly depends on how confident you are with dealing with HMRC and what can be quite complex taxation categories.

A step-by-step guide to setting up a limited company

Choose a company name and register it

Choose a company name and register itYour company is seen as an entirely separate entity to you and can succeed or fail without it affecting your personal financial affairs. Choosing a good name is important – it has to be unique and it has to be flexible enough that, if you decide to pivot and offer slightly different services, it will still make sense.

Once you’ve chosen your company’s name, you must register it at Companies House. You can usually do this inexpensively and online.
To register you need:

  • A company name
  • A company address
  • A named company director (if you’re in business alone, this will be you) and, optionally, an appointed company secretary
  • Details of the company’s shares with at least one shareholder (which again, will probably be you – the next step goes into this in more detail)
  • Your profession’s SIC (a code that identifies what type of industry you’re in – there’s a full list on the gov.uk website)

Allocate your company’s stocks, shares and dividends

Allocate your company’s stocks, shares and dividendsMost often, a ltd. contractor makes the bulk of their money through their monthly dividend package. Usually limited company contractors pay themselves a small salary of about £9,000 p/a and then bump up their earnings with dividends which don’t come with National Insurance payments and are taxed at a lower rate.

What do stocks/shares/dividend actually mean for my business?

This can be a hugely complicated area but, to put things in simple terms, a dividend is a business’s profits after all its taxes and expenses have been paid.

To have shares in a private company is to be apportioned an amount of the company’s dividends, proportional to the percentage of shares you own. Shares and stock mean broadly the same thing but if you say you “own stock” it is assumed that you are talking in a general sense and that you own shares in several different companies. To talk about having shares is to talk about one company in particular.

How do I allocate shares in my company?

Limited company contractors don’t tend to have a lot of shareholders, in fact it is common in one-person companies that the director owns 100% of the shares. If you do choose to allocate shares elsewhere (for example, your spouse) you need to issue a dividend voucher for each person that you nominate.

The wording of the dividend voucher is important and you can download templates that will make sure everything’s above board. You must also keep a record of the dividend declaration through the minutes of your company’s board meeting and it must be signed by you, the chairman or sole director.

There’s no need to produce a physical voucher – a digital version is fine. You will also need to pay stamp duty for every sale to HMRC.

File a Memorandum of Association with Companies House

File a Memorandum of Association with Companies HouseThis is an important document that legally describes how your contractor limited company is going to be run and defines your relationship with shareholders. If HMRC questions your company in a tax dispute or you have to prove that you don’t fall under legislation, this document will be scrutinised in court.

Set up a business bank account and payroll

Set up a business bank account and payrollLegally, a contractor ltd. company must have its own dedicated bank account. You can choose to set this up yourself, or, if you’re using an accountant, they can designate a bank that best serves your needs.

You’ll also need to set up a company payroll so that you can draw a salary from your business and deduct tax and national insurance as appropriate. HMRC will send you a ‘New Employers’ pack giving you details on how to do this.

Corporation tax and VAT registration

Corporation tax and VAT registrationYou can do this on the HMRC website and within 3 months of starting your business. After you’ve registered with Companies House, you’ll receive a welcome pack that contains your Unique Taxpayer Reference (UTR). This is the reference number that you can use to get the ball rolling and register online.

VAT registration is not obligatory unless your business is expecting to earn at least £85,000 in the coming year but it is often advisable because of the VAT claims you can make on any business purchase. You can register for a Flat Rate VAT Scheme (FRS), which are designed to make accounting easier for small businesses but are not necessarily worthwhile if your company’s turnover is on the smaller side. You can take a quiz on the HMRC website to see if FRS is right for you or alternatively you can talk to your accountant.

Frequently Asked Questions

  • Why should I use an accountant?

    Sometimes it’s best to avoid the potential headaches of complex legal and financial procedure and employ a professional well-used to setting up a limited company for contractors. A decent accountant will provide a roster of services that will take you through the entire process of starting a company and will iron out any of the difficulties associated with the set-up. To authorise your agent, you must submit Form 64-8 to HMRC, a process that can be easily executed online, provided your accountant initiates it from their end.

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