Running a Limited Company as a Contractor: The Basics Explained

Operating through a limited company (often called a personal service company or PSC) is the most common structure for UK contractors who earn above a certain day rate and are mostly outside IR35. The financial advantages over sole trader status or umbrella employment are real, but the company comes with obligations — to Companies House, HMRC, and to yourself as a director — that require either an accountant or a significant time investment to manage correctly.

This guide covers the fundamentals every contractor-director should understand.

What a limited company actually is

A limited company is a separate legal entity from you as an individual. It can enter contracts, own assets, open bank accounts, and incur debts in its own name. Its liability is limited — if the company owes money it cannot pay, your personal assets are not automatically at risk (subject to exceptions for directors acting improperly).

As a contractor, you typically form a company with one or two shareholders (you and possibly a spouse or partner), appoint yourself as a director, and the company contracts with your clients directly or through an agency. The company invoices for your services, receives the money, pays you a salary, and distributes remaining profits as dividends.

Setting up

A limited company is incorporated through Companies House. The fee for online incorporation is £50 and can be done in hours via the Companies House online service or through an accountant. You'll need to provide:

• The company name (checked for availability)
• Registered office address (can be your home or accountant's address)
• Director details
• Shareholder details and share structure
• SIC code (sector classification)

Once incorporated, you receive a Certificate of Incorporation and a Company Registration Number. The company must open a dedicated business bank account — mixing company and personal finances is a significant compliance risk.

You'll typically need to register for Corporation Tax immediately and for VAT if you expect turnover to exceed £90,000.

The salary and dividend strategy

The core of limited company tax efficiency is the combination of salary and dividends.

Director salary: Most contractor-directors pay themselves a salary equal to or just above the National Insurance Secondary Threshold (£9,100 for 2026/27) or up to the Personal Allowance (£12,570). At these levels:

• At £9,100: no income tax, no employee NI, no employer NI — but may not build a qualifying NI year for State Pension purposes
• At £12,570: no income tax, no employee NI (but a qualifying NI year is earned), small employer NI liability (£9,100 is the employer threshold, so salary above this costs 15% employer NI from the employer — but the employment allowance of £10,500 can eliminate this for eligible companies)

A salary of £12,570 is common and builds the State Pension qualifying year without income tax cost, thanks to the Personal Allowance.

Dividends: After the company pays Corporation Tax, remaining profits can be distributed as dividends. For 2026/27:

• £500 dividend allowance: tax-free
• Dividends in the basic rate band: 8.75%
• Dividends in the higher rate band: 33.75%

At a salary of £12,570 and dividends up to £50,270, the entire income is basic rate — dividend tax of 8.75% on dividends above the £500 allowance.

Use the Ltd vs Sole Trader Calculator and the Dividend Tax Calculator to model your position.

Corporation Tax

The company pays Corporation Tax on its profits each year. The rates for 2026/27:

• 19% on profits up to £50,000 (small profits rate)
• 25% above £250,000 (main rate)
• Marginal relief on profits between £50,000 and £250,000

For most one-person contractor companies, profits remain below £50,000 (after salary) and the 19% rate applies. Corporation Tax is due 9 months and 1 day after the company's accounting year-end.

What you must file

Running a limited company involves mandatory filings to two bodies:

Companies House:

• Confirmation Statement (formerly annual return): once per year, confirming company details. Fee: £34 online.
• Annual Accounts: a set of financial statements (even abbreviated accounts for small companies) filed within 9 months of the company's financial year-end.

HMRC:

• Corporation Tax return (CT600): filed within 12 months of the accounting year-end. Tax paid within 9 months and 1 day.
• Self Assessment return (SA100): for the director personally, declaring salary and dividends.
• PAYE Real Time Information (RTI): monthly payroll submissions for the director's salary.
• VAT returns (if VAT-registered): typically quarterly.
• Confirmation of corporation tax registration and regular filings with HMRC.

Most contractors use an accountant to handle accounts and CT600. Typical accountant fees for a one-person limited company are £800–£2,000 per year. This cost should be weighed against the tax saving versus sole trader or umbrella status.

Dividends: the mechanics

Dividends can only be paid from distributable profits — profits after corporation tax that have not already been committed to other liabilities. You cannot pay dividends if the company has no retained profits.

To pay a dividend legally:

1. Check the company has sufficient distributable profits in its accounts
2. Record a board resolution authorising the dividend (even as a sole director, this must be documented)
3. Produce a dividend voucher — a simple document showing the amount and date
4. Transfer the money to your personal account

Dividends must be declared in the ratio of your shareholding. If you and a spouse each own 50%, every dividend must be split equally. If one shareholder doesn't want their portion, they cannot waive it informally — it's still taxable income.

HMRC scrutinises dividend arrangements where income appears to be shifted artificially to a lower-earning spouse. The rules around this (the settlements legislation, including the Arctic Systems case) mean you should get professional advice on share structures before adding a spouse as a shareholder.

Running costs of a limited company

| Cost | Approximate annual amount | |---|---| | Accountant (accounts, CT600, payroll, SA) | £800–£2,000 | | Companies House annual confirmation | £34 | | Business bank account | £60–£180 | | Accounting software | £120–£360 | | Professional indemnity insurance | £300–£800 | | Business telephone and broadband (portion) | £300–£600 |

A one-person contractor company in a service sector might spend £2,000–£4,000 per year on running costs. These are all deductible business expenses for Corporation Tax purposes.

When a limited company is worth it

The financial advantage of a limited company over an umbrella or sole trader structure depends on:

• Day rate and total annual contract income
• Whether contracts are inside or outside IR35
• How much you take out vs retain in the company
• Accountant costs

For outside-IR35 contracts at £300/day or above, a limited company typically saves £5,000–£15,000 per year compared to umbrella after accounting for running costs. Below £200/day, the advantage may not cover accountant costs and administration time.

If your contracts are inside IR35, the limited company advantage disappears — the company structure delivers no tax benefit for inside-IR35 income. In this case, umbrella may be simpler.

The IR35 Calculator models the inside/outside comparison, and the Ltd vs Sole Trader Calculator compares limited company versus sole trader for your income level.