Running a limited company as a UK contractor

Introduction

This is our official guide on running a limited company as a UK contracting professional. When you run your own contractor limited company or, are a small business owner in general, what should we consider? Basically, when we think about how to run a limited company, there’s many things to think about from day to day. If you’re new to contracting and plan to become an IT contractor (UK) or a contractor in another industry, you should be aware that when you start contract work, limited company contracting status is usually the best option. Therefore, in this guide we’ll research running a UK business as a limited company contractor.

This guide contains lots of good company advice when running your own business. Indeed, we’ll look at the pros and cons of an UK IT contractor running a company to provide their IT contractor services through later in this article. Therefore, you may be looking how to start as a contractor and operate in the UK contracting market. In this guide, we’ll cover more later on with regard to setting up a contractor business.

As a UK limited company contractor in the contracting industry, you’ll need to complete all your daily tasks. These tasks as a company director are related to your ltd contract role. However, when you’re an independent contractor (UK) and are contracting as a limited company, you’re also in complete control of how you pay yourself. When you’re employed or work through an umbrella company, this is not the case and the extra tasks are minimal.

Initial thoughts

First thoughts 

There are many benefits of setting up a limited company when contracting in the UK. We’ll cover what to consider in terms of setting up as an independent contractor later on running a limited company. However, in some instances you may need to consider is contracting worth it (UK). Indeed, this will depend on your individual circumstances. Later, we’ll explain the pros and cons of being a contractor vs employee (UK) or umbrella company worker (UK). However, before this, we’ll explain the processes of:

• How to set up limited company for contracting. We’ll look here at the contractor process, in terms of company setup.

• How to run a company smoothly and effectively. When we consider how to run an IT company or how to run a ltd company, there’s many areas to cover. However, you should know what your director’s duties are and make sure you comply with the UK authorities. In addition, you should also have a good accounting system and keep up with your business record keeping.

• What to consider when you run your own business as a limited company contractor. What’s more, we’ll cover how to pay yourself tax efficiently.

Further initial thoughts

Some people ask can I be a contractor for my own company and the answer is yes. Basically, you can work this way if you can land a contract for your services through your own contracting company. Lots of contractors work in IT in the UK and they will use their own IT contractor limited company. There’s one main reason why you may go through the setting up your own company as a contractor process which is the alternative to operating as a contractor sole trader. Therefore, the main reason for contracting through your own company is because it is more tax-efficient. Indeed, when starting out as a contractor, this is generally why all those who run their own IT contractor companies choose to work this way. Some agencies and clients only work with IT contracting companies, rather than with those contracting as a sole trader.

There are many pros as well as some cons, when we look at how to run a limited company. This guide on running a limited company is ideal for a first-time contractor. However, it’s also useful for someone who has been a contractor limited company for a while. In addition, this guide is good for UK company owners in general.

Initial thoughts on how to become a contractor (UK)

Let’s investigate how to become a contractor, as part of contracting through your own company. First, you will need to search and organise your limited company contracting work. Basically, if you work in IT, you’ll be looking for IT contractor work in the IT contract market. This involves looking for contractor jobs (UK) on the various job boards. You can also visit recruiter websites to source your first limited company contract. Indeed, many who want to be IT contractors (UK) or contract in other industries will consider:

• How to become a software contractor (UK).

• What do I need to do to become a UK contractor?

• How to become an IT contractor (UK).

• How to become contractor in financial services.

• What to do to become a contractor in other industries.

However, when you are working as a contractor (UK) you are also a company director. Therefore, you’ll have specific director duties to adhere to. Furthermore, some of your personal details will be available on the UK public record. Therefore, there are additional considerations here as part of being a UK director.

Common questions

Before starting up to be your own contractor for the first time, you’ll likely have many questions. These will be include being a contractor in a company and what to expect. They may also be about how does a limited company work in the UK. Therefore, such questions from those have who are looking to be a contractor consultant with their own company will include:

• How does contracting work in UK?

• Is it worth being a contractor (UK)?

• How do I become a contractor?

• What do you need to become a contractor?

• Can I be a contractor without a company?

• Can you be a contractor to your own company?

• Do I need to incorporate as an independent contractor?

• How to set up a limited company for contracting.

• What does it mean to work as a contractor?

• How to become a private contractor.

• How to get contracts as a contractor.

• How to run a contracting business.

• Can I pay myself as a contractor from my own company?

• How to keep track of taxes as a contractor.

• How can I run my company tax efficiently?

Another key thought is how to pay less tax as a limited company & how to save tax as a contractor. On this website, we have lots of articles that cover both of these areas in great detail. Therefore, please feel free to browse the blog if you are looking for something in particular.

What is a limited company contractor? 

Can I be self-employed and a director of a limited company?

For the layman, some confusion can arise as some people will consider themselves as a `self-employed limited company’. In addition, some other people will ask `is a director of a limited company self-employed?’ In a legal context, self-employed is not the same as being a director of a UK contracting ltd company. Therefore, if you consider am I self-employed if I have a limited company the answer is no. Therefore, if you’re a company director running your own contracting business, you are not self-employed.

In general

When you go limited company contracting you will provide your services through your own UK contractor service company. As we consider how to work as a contractor (UK), you’ll supply your services through your contractor’s limited company. Therefore, when you’re getting set up contracting, your services will be based on your skills. In addition, you will provide these skills to your client or customer.

Using your own limited company for contracting is different from working as a PAYE employee. It is also different from working through an umbrella company. First, when you are contracting through a limited company or are a company owner in general. In addition, you and your company are two separate legal entities. Therefore, when you’re an incorporated contractor in the UK, your customer will pay your company, rather than you personally. In turn, your company will pay you a salary and dividends if it so chooses.

If you’re employed or work through an umbrella arrangement, you’ll submit a timesheet each week or month. Once this is processed, your employer will pay you based on your work. If you run a UK contractor limited company you will send an invoice to your client. However, in some cases, you may still need to send a timesheet.

How to set up as a contractor (UK) 

Setting up a ltd company for contracting

When we consider how to set up a limited company (UK) for contracting, there’s choices available in respect of contractor company formation. Furthermore, when you’re setting up a limited company for contracting in the UK, there’s plenty to consider. Basically, when you’ree thinking of becoming a contractor (UK) and would like to know how to set up my own company, our UK contracting guide goes into the contractor setup process in more detail.

First, when setting up your own company for contracting, you’ll need a contract for your services. You may land the contract with a recruitment agency or via a client directly. Once you know you’ll be landing the contract, you can go ahead with setting up a limited company as a contractor. Therefore, once you begin setting up as a contractor (UK) you’ll have to incorporate a new UK company. In addition, when you’re a new contractor setting up a limited company, you’ll need to consider contractor company names and choose the best one for your new business. What’s more, when you look how to set up a limited company for contracting (UK), there’s several ways you can organise this:

• Do it yourself.

• Let your accountant do this.

• Use a company formation service.

Many limited company contractors (UK) and small business owners will let their accountant handle the formation process. However, you can organise the UK contractor ltd company set up yourself if you’re informed in advance of what is required.

Running a limited company -admin tasks and responsibilities

When you’re employed or work through an umbrella, submitting your timesheet is probably the only admin task you will have. In comparison, when you have your own IT contractor company or company in another field, your business needs to maintain accounting records or books. Therefore, when you run your own business as a limited UK company, you should keep an adequate accounts record of all your transactions. Also, you should also adhere to any annual filing requirements. Basically, these filing requisites for a contractor limited company come by way of annual accounts and a Confirmation Statement, as well as a company tax return.

When you’re working through a limited company and run your own contractor business, there’s also additional VAT return filing if you’re VAT registered, and PAYE filing if you run a PAYE scheme. Indeed, these are all part of the official responsibilities when you have your own limited company in the UK.

Therefore, when you are contracting through your own company there are extra responsibilities. However, there are many advantages to running a contractor ltd company the main one of which is your limited company take-home pay, and we will cover these advantages later.

Running a limited company -initial tasks once your company is set up

Once you have set up limited company for contracting, there’s some additional tasks to take care of. Therefore, once your contracting limited company is in place, these extra basic tasks to complete as part of owning a contracting company are as follows:

• When you’re starting a contracting company, you need to appoint an accountant, if you’ve not already done so. Basically, the majority of UK contractors tend to use accountants for limited company contractors. What’s more, these are specialist contractor accountants as they’re knowledgeable within the UK contracting space.

• As you’re starting a contractor business, you need to set up a company bank account.

• When you become an independent contractor, you should take out the required contractor business insurance cover for your new business. A benefit of using this website is when you’re starting a business as a contractor or have been contracting a while, you can get a contractor discount on your insurance. Please visit the insurance link above to find out more.

• Choose a bookkeeping-type package for your business. When you’re starting a contracting business, your decision here is based on whether your business will be VAT registered or not. This because there are extra considerations in terms of VAT reporting. Using an online system will make this task a lot easier.

• We recommend you set up your business tax account with HM Revenue & Customs when you’re starting as a contractor in the UK.

Delegating tasks and other thoughts

You can delegate many of your duties and responsibilities to your accountant when you are limited company contracting. However, when you are a ltd company contractor, it does not harm to be more organised yourself when you have your own contracting company. Indeed, as a contractor & director or your new business, it is good to get your contractor business management and, in addition, your contractor finances in order -banking, accountant, insurance, income protection etc from the outset.

It is also good, from the outset, to know how you should maintain your business records. In addition, you should also be aware of how long you need to keep your business records.

We have detailed all the annual filing dates you may need to meet as a company director and someone who files a Self-Assessment Tax Return. It is a good idea to make diary notes of these, and then you can track when payments are due. 

Limited company contractor guides

UK contracting guide

We also have a first-time contractor’s guide to limited company contracting in the UK. This gives a complete overview of what to consider when you start as a contractor or a consultant operating independently with your contracting UK limited company. Much of the information will also apply to many other business owners working for themselves for the first time.

Tax tips for UK contractors 

Besides this guide on how to run a limited company, please read our article covering tax tips for limited company contractors. This contains many handy tips and advice that you should know when you have your own independent contractor company or small business. The article includes our latest guidance for the best tax planning ideas when you are limited company contracting. 

Running a limited company -contractor taxes and other helpful tax guides 

If you start your own business and are working as a contractor through a limited company, there are several company taxes that you need to be aware of. This will include VAT registration and considering whether you are better off under the Flat Rate VAT or the standard VAT scheme. When you are contractor working through your own company, this will also include setting up a PAYE scheme if you intend to pay yourself and any other person a salary from your business while limited company contracting in the future.

We have written some extensive guides on UK contractor taxes which will help you understand how these taxes work:

• VAT guide.

• Corporation Tax guide.

• National Insurance guide. 

Other considerations 

Ltd company vs PAYE -when might a contractor limited company not be the best option? 

Is being a contractor worth it? Basically, the setting up limited company for contracting process is not always the best option to go through in some circumstances. If you are planning on working as a contractor through a limited company you should check this with your accountant. When it is not the best option, you may opt for an umbrella scheme type set-up. As an alternative to limited company contracting, you could instead work on a self-employed basis. There are three main reasons you may find that going ltd company contracting is not worth it:

• You may be on a lower income, perhaps £25,000 or less per year.

• The work is subject to the IR35 rules.

• You may only intend to contract or work independently for a short period.

Therefore, please consider this if you plan to set up a contractor limited company. It is key to get your set up right from the start. As a result, you can then work on the most efficient basis.

HMRC Business Tax account and other areas

The tax requirements for contractors over the course of a year will include Corporation Tax, VAT (if you are VAT registered) and PAYE/NIC (if you run a PAYE scheme to pay salaries). When you own a ltd company, setting up a Business Tax account with HM Revenue and Customs is a good idea. You can then keep an eye on your contractor taxation by having the ability to view your tax accounts with HMRC online. In addition, your accountant can also view this once they are added as an agent for each tax service.

Another good article on this website is how to work out how much profit there is in your company at any time.

Importantly, if you ever find yourself in a position in the future where your company cannot pay its taxes, there are certain things that you will need to consider. 

The main areas to consider when you have your own contractor company

Initial considerations

There are several things to consider when you’re running your own business. Indeed, when you set up a company for the first time these include:

• Setting up your company. You can do this yourself, ask your accountant, or use a formation agent. As part of this, you will need to choose a registered office, who the director(s) are, who the shareholder(s) are, your SIC code (trading activity) and whether you would like a company secretary (nowadays most small companies do not have one as it is no longer a legal requirement). 

• Your choice of a business bank account.

• Make sure you have adequate insurance in place. Professional Indemnity Insurance is a usual requirement for contractors.

• Appoint some company accountants to look after your company’s annual returns. These returns will include filings at the UK’s official bodies [Companies House and HM Revenue & Customs (HMRC)]. If you are a contractor, it would be wise to find a specialist contractor accountant to look after you from the outset.

Further initial considerations when I run my own company 

Some further thoughts will include:

• Consider whether you will need to register for VAT and whether you should register for the VAT Flat Rate scheme or the standard VAT scheme. Nowadays, the standard scheme is the most advantageous for most limited company contractors compared to the VAT flat rate scheme.

• Learn how to invoice your client ready for when you are getting paid as a contractor. If you use an online accounting system (see the next point), in most instances, you can create your invoices within the online system.

• Choosing a bookkeeping/accounting system. Nowadays, most business owners choose to use accounting software, which is an online digital service. When you are a contractor, you can choose to use contractor software (UK) for your accounting. This makes your company’s record-keeping more accessible and saves time.

• Consider how you will get to work and what you can claim for this. You can use your personal car for business journeys and claim a mileage allowance if your trips fit specific criteria. You can also travel by other means such as train, bus or bike.

How to run a limited company -considerations going forward

Some further considerations when you are running a limited company include: 

• As a director of your own independent contractor company, pay yourself a salary.

• Employing staff to work for your company. You might also consider paying your spouse a salary if they will be working for you.

• Learn how to pay yourself dividends. The payment of these is based on what your company shareholding is set up as. In addition, you can also look at how to pay yourself tax-efficiently when you run your own business.

• Consider starting a contractor limited company pension scheme to save further company tax (see below).

• Learn about your company’s annual filing requirements throughout the year. Your limited company contractor accountant will help guide you here with regards to:

1. 1. 1. Filing your accounts at Companies House.
      2. File your company tax return.
      3. When to pay your contractor Corporation Tax.
      4. File your company’s Confirmation Statement with Companies House.

However, it is also a good idea for you to keep track of what is due and when.

Contractor expenses

Please ensure you claim all your contractor business expenses to help reduce your contractor limited company tax. As a business contractor with your own company, there is a second consideration here if you claim for any business expenses you have paid personally, your company can also reimburse these to you, rather than you standing the cost out of your own personal income (which has already been subject to tax).

Business contracting expenses which you will incur via your independent contractor company will include things like:

• Travel costs.

• Mileage allowances for your private car.

• Private motorbike or private bicycle.

• Office costs, including use of home as an office.

• Broadband fees.

• Phone costs.

• Training costs.

• Accountants’ fees.

• Software.

• The costs for your own business website.

• Computer equipment.

• Business clothing(where this meets specific criteria).

• Relevant Life Insurance.

• and many more.

The IR35 / off-payroll rules

If you are contracting with your own company, it is best to be working outside the IR35 rules. When you are outside IR35, two other questions in respect of limited company advice which pop up from contractors in terms of how to pay yourself from a limited company (UK), are:

• What director’s fees do you recommend as a sole director if I am outside IR35?

• What director’s fees do you recommend as a director with additional employees if I am outside IR35?

In both cases, you could pay yourself tax efficiently or you could take all of the post-tax profits from your company as a mixture of salary and dividends. If you prefer the latter, please read this article on how much dividend can I take.

Another question from an established contractor with their own company is:

Can I keep my limited company open if I’m working via an umbrella solution?

The answer to this is yes, however if the umbrella work continues for a number of months, then you should ask your accountant if they can reduce your accountancy fees. If the umbrella work continues beyond say a year it might be time to consider closing your company.

The advantages for a contractor limited company owner

Let’s now look at the advantages of being a limited company contractor or a company owner in general. These advantages of contractor vs employee (UK) or umbrella company worker (UK) are: 

Main advantages

• When you run a ltd company, you will have a higher personal income. Due to the ability to take your income as a mix of salary and dividend, as a ltd contractor you will pay less income tax than someone employed or self-employed. Therefore, when you are in the position of owning a limited company, based on your contract rate, this could be hundreds or thousands of pounds of extra income every year.

• If you are working as an IT contractor, via your own IT contracting company, you will have professional status. Your company’s standing will also increase once you start as a contractor, and your clients may hold your business in high regard in the future. A change in perception stems mainly from the fact that the business world watches companies more closely. To clarify, UK directors with their own contracting companies (UK) have more legal duties and reporting requirements that they will need to comply with. The business world and the public can also view their accounts and corporate details on the public register.

Secondary advantages 

• Limited liability for the director. One of the biggest pros of creating your own company is the limited liability protection for the director. If things go wrong for your single person limited company in the future, your private assets are secure. This is because a company is a separate legal entity in its own right. That is unless you have personally guaranteed a bank loan. There are also other exceptions here when a director is guilty of wrongdoing.

• You can claim a broader range of expenses as a limited company. Indeed, this is one of the benefits of being a contractor with your own company. What’s more, for any actual business costs which you pay yourself, you can assign them to your company and claim them back as business expenses. If you can claim a cost as a business expense, your company will save Corporation Tax. Currently, the rate of this is 19% up to 31 March 2023, however from 1 April 2023 this rate increases. Companies with profits under £50K will pay tax at 19% while companies with profits over £250K will pay 25%. Companies with profits between £50K and £250K will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective Corporation Tax rate.

Further advantages 

• When you have your own contracting company, you are in complete control of your own business affairs. Indeed, when you are ltd contracting, this includes both financial and administration-type duties, and you are the decision-maker for your business.

• You can be more tax-efficient through your own contractor’s business. Please see our article on contractor tips referenced above. In addition, you can also plan your company’s and your own finances better. The company Corporation Tax rate is currently 19% if your profits are under £50K or at a higher tax rate if your profits are over this, as explained above. Likewise, the personal tax rate for the employed and self-employed varies between 20% and 45%. Moreover, the basic tax rate on dividends is now 8.75%.

• You could split the business income. When you have your own company, you have the option to transfer some shares. This could be to your spouse or one of your family members. Dividends are then payable from the company bank account to the shareholders in line with the share ratio.

Extra advantages

• When you have your own UK contracting limited company, you have protection of your company name. Indeed, UK company names are unique, and no two are the same. Therefore, once you have started your own contracting company, its name is unique to you. However, this is not the case for those that are self-employed.  

• There will be the option to be able to defer some of your income into the future. When you operate through your own contracting company, you will decide what salary and dividends to pay and when you would like to pay these. If you do defer some of your income, you might then draw this at a later time. This could be when perhaps you have only worked for part of the year, and your income in that year is lower than usual. Indeed, this is a far more tax-efficient way to take your income rather than draw all of it in the year you earn it. When you make a good income and draw it all, you may pay higher rates tax on the amount that falls in the higher rates tax band. When you have your own contracting company, you can plan around this.

Better credibility with the outside world

Your business will be more credible to the outside world. When you have your own contracting company with a corporate image, this will make your business more credible. Certain recruitment agencies in the finance and IT industries will only engage with companies. Indeed, this is generally due to the risk in the contracts they offer. If you deal with sensitive data or information or are involved in large-scale contracts, the client will ordinarily request limited liability protection from contractors to who they offer contracts. Agencies will also not provide this type of work to the self-employed. Therefore, a company can improve its competing edge. 

Pension scheme 

A company provides the chance to invest pre-tax trading income into a company pension scheme. On the other hand, you can invest in a pension scheme on a personal basis. You will do so from your post-tax personal income when you invest personally. Your pension advisor will be able to discuss this with you and advise which is better. However, paying from your company allows you to extract additional income without incurring higher tax rates. 

The disadvantages when you are a limited company contractor or company owner in general

There are also disadvantages of running a limited company in the UK. These can be compared with contractor self-employed vs limited company or PAYE vs contractor in that the points below are advantages when you do not run your own limited company and work as self-employed or are employed. 

Main disadvantages 

• You will spend more time on administration. This will include when you do your bookkeeping. It will also include when you perform your filing duties. This will encompass the filing of the annual accounts and Confirmation statement etc.

• You will be in charge of your company’s affairs. As part of this, it will involve meeting the various deadlines and due dates each year. The statutory records will also need to be kept up to date. Even if your accountant looks after these for you, the actual duties are your responsibility.

• If you provide your contract services via your own contracting company, the IR35 legislation could apply to relevant work assignments. Indeed, this could be the case if you have not acted to comply with these rules. The financial costs when you are subject to IR35 are sizeable. However, due to recent changes in IR35, the responsibility for determining the IR35 status now lies with the business providing the work when that business is a `medium’ or `large’ business. If the business providing the work is a `small’ business, then the responsibility still lies with the contractor. 

Other disadvantages of running a limited company 

• Any one-off company set-up fees. There are also costs in the form of accountancy fees. When you file the Confirmation Statement each year, there is a £13 filing fee with Companies House.

• It is not the best step if you only plan to contract for a few months before you return to full-time employment. If you set up a company, it may prove to be more costly than it is beneficial.

Furthermore, when you think about closing your company, there is a particular process to follow.  

Final thoughts 

UK contracting does, in the main, suit the majority of contractors. In this article, we explain in detail how to run a limited company and what to think about when you have your own independent contractor company. Indeed, some good company advice is the more an individual earns, the more advantageous it is to run a company of their own. If you do go contracting, running a limited company leaves you with plenty to think about, as highlighted in this guide.

However, as highlighted earlier, running a contractor limited company is not for everyone. Some agencies will also only offer contracts to contractors with their own company. When you provide services in the type of market that many UK contractors operate in, such as information technology (IT), banking, management consulting, and engineering, you may be more likely to secure a contract with your own contracting company.

Finally, we explain here what to consider if you are thinking of moving from an umbrella company to your own company.

Link to Contractor Advice UK group on

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