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 £83,000. 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:
1. Income tax
|Annual earnings in 2016/2017||Income tax charges|
|Up to £11,000||0%|
|£11,000 to £43,000||20%|
|£43,001 to £150,000||40%|
If you were born before 6th April 1938, you qualify for a personal allowance of £10,660 instead of £10,600. This reduces by £1 for every £2 that your adjusted net income is over £27,700.
2. Dividend tax
|Dividend income||Tax rate charged|
|£5,000 and under||0%|
|£5,001 to £32,000||7.5%|
|£42,001 to £150,000||32.5%|
For more information about dividend tax, please see our guide.
3. 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 in 2016/2017||Tax rate charged|
|Earnings 2016/2017||Tax charged|
|Under £155 per week||0%|
|Between £155 and £827 per week||12%|
|Above £827 per week||2%|
Income Tax and National Insurance payments are made to HMRC on a monthly or quarterly basis. Since the introduction of Real Time Information, you’ll also need to send certain information to HMRC every time you or another employee is paid. For more information about running a payroll, please click here.
Register for Corporation Tax
Put simply, this is a tax on all the money that’s left over once your business expenses (including salary) have been deducted. The rate you’ll pay currently stands at 20%.
It’s important to inform HMRC within three months of setting up your business that you’re liable to pay Corporation Tax. You can do this by filling in form CT41G (Corporation Tax – Information for New Companies) and returning it to HMRC.
Take out business insurance
As an independent contractor, you’ll need to take out the correct insurance in case something goes wrong. Clients will usually insist on you having policies in place before offering assignments, so it’s essential you get yourself covered.
Here are the types of insurance you’ll need:
- Professional indemnity
This protects against any compensation claims for negligence, loss of documents or data, breach of contract and unintentional breaches of copyright and/or confidentiality. It not only covers you for the expense of defending a case, but also any compensation that’s awarded.
You may also want to think about run-off cover, which covers you against claims made after your assignment has ended.
- Public liability
A public liability policy covers you against claims lodged by a member of the public, should you accidentally damage property or injure them during the course of your assignment. This insurance is essential if you deal directly with the public, have clients that visit your office, or if you visit the client’s site.
- Employer’s liability
This policy is only required if you employ another member of staff, and covers you if they suffer an accident or injury while at work.
Learn about IR35
In 2000, the government introduced IR35 to protect against so-called ‘disguised employment’. Put simply, this is where a worker operates via a limited company to carry out duties similar to permanent workers.
The legislation works on an assignment-by-assignment basis and determines how tax and National insurance should be paid on each project. Contrary to popular belief, it’s not designed to tell contractors what type of work to take on.
Your assignments are assessed according to different criteria to determine whether you’re inside or outside the legislation. For more information about IR35, please click here to view our handy guide.
Appoint a specialist contractor accountant
We understand that the amount of administration involved in running a limited company may seem daunting at first. Thankfully, you won’t have to go through it alone!
If you join a specialist accountant, such as ClearSky Contractor Accounting, they’ll help take all the hassle out of owning your business. This leaves you free to concentrate on doing what you do best.
A contractor accountant will help you with important dates, check your IR35 status and make sure you stay whiter than white with HMRC – giving you peace of mind that everything’s taken care of.
If you’re thinking about making the leap to limited, we’re here to help. Over the years, we’ve helped thousands of professionals take the next step in their career and become their own boss.
At ClearSky Contractor Accounting, we’ll be with you all the way through your contracting career. From incorporation to providing information on important deadlines and helping with IR35, we’ll relieve the burden of running a company.
We understand that a contractor’s WorkStyle isn’t just 9-5, so neither are we. Our online portal lets you manage your account and submit expense claims any time day or night. What’s more, you’ll be given your own personal accountant to assist you whenever you need them.
For more information, or to join us, please call 08007 870 503 or email email@example.com.