A contractor limited company is a private limited company you register to deliver your freelance services through, sitting between you and your clients so your personal finances are shielded and your income can be taken in a more tax-efficient mix of salary and dividends. It is the default structure for UK contractors earning above a modest threshold, and for most people it saves real money against sole trading. The savings are conditional, though. IR35 can strip most of them out on any contract that looks like disguised employment, and the company carries filing duties that punish neglect quickly.
What a Contractor Limited Company Actually Is
The company has two roles: director and shareholder. If you are working alone, you fill both. The director runs the business and handles its legal obligations; the shareholder owns the equity. The law keeps those roles separate even when one person holds them.
The point of incorporating is limited liability. If the company becomes insolvent or faces a claim, creditors generally cannot come after your home or personal savings. Your loss is capped at what you have put into the company.1Trans-Lex.org. Salomon v Salomon and Co Ltd 1897 AC 22 That protection depends on treating the company as genuinely separate from you, which is why the housekeeping (a dedicated bank account, proper dividend paperwork, clean records) matters from day one.
Setting It Up
Registration goes through Companies House. Online costs £100 and is usually processed within 24 hours. Paper filing costs £124 and takes 8 to 10 days.2GOV.UK. Companies House Fees Online is the sensible route unless your structure is unusual.
Before you register, you need:
- A unique company name that does not clash with existing trademarks or mislead the public
- A registered office address where post can be received and acknowledged3GOV.UK. Set Up a Private Limited Company – Check the Rules for Registered Office Addresses and Email Addresses
- A Standard Industrial Classification (SIC) code describing what the business does
- A Memorandum of Association and Articles of Association (the standard model articles are fine for most sole-director contractor companies)
- Director identity details and a statement of capital4GOV.UK. How to Complete Form IN01
Most contractor companies issue a single £1 share, which is enough. Once approved, Companies House sends a Certificate of Incorporation with your company number and formation date.5GOV.UK. Register Your Company You will need it for the bank and for HMRC.
What You Do Right After Incorporation
Open a business bank account before you invoice anything. Running client money through a personal account weakens the liability protection and turns year-end into a mess.
Sort insurance next. Professional indemnity covers claims arising from mistakes or negligence in your work. Public liability covers third-party injury or property damage. Most clients and agencies will not engage you without evidence of both. If you take on any staff, employers’ liability insurance is a legal requirement.
Register the company for Corporation Tax with HMRC within three months of starting to trade. If taxable turnover exceeds £90,000, VAT registration is mandatory; contractors in IT and professional services often cross that line quickly.6GOV.UK. How VAT Works – VAT Thresholds Voluntary registration below the threshold lets you reclaim VAT on business expenses but adds paperwork. Register a PAYE scheme too if you plan to pay yourself a salary, which nearly all contractor directors do.
How You Get Paid: Salary and Dividends
This is where the structure earns its keep. The usual approach is a low director’s salary topped up with dividends from company profit. The salary is a deductible business expense and reduces Corporation Tax, but it triggers National Insurance for both you (as employee) and the company (as employer).
Since April 2025, employers pay NICs at 15% on earnings above the £5,000 secondary threshold, up from 13.8%.7GOV.UK. CA44 National Insurance for Company Directors That change makes salary more expensive than it was, and it has pushed the optimal salary figure downwards for many contractors. Most set salary at a level that preserves state pension credits while keeping the NIC hit small. The exact number depends on personal circumstances, and a contractor accountant is worth the fee for pinning it down.
Dividends come out of distributable profit, meaning what is left after every expense and the Corporation Tax bill have been settled.8GOV.UK. CTM15205 Distributions – General – Dividends Distributions and Company Law Declaring a dividend the company cannot lawfully pay is unlawful, and the director can be personally liable.
The first £500 of dividend income each year is tax-free. Beyond that, the rate depends on your overall income band:9GOV.UK. Check if You Have to Pay Tax on Dividends
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
Even at the higher rate, dividend tax comes out cheaper than the combined income tax and NIC cost of taking the same amount as salary. That gap is the core reason the limited company structure saves money.
Every dividend needs a voucher showing the date, the company name, the shareholder receiving payment, and the amount.10GOV.UK. Your Responsibilities – Taking Money Out of a Limited Company Keep one copy on the company records and one for your personal tax return. New contractors skip this step routinely and it always costs them later.
Corporation Tax and Deductible Expenses
Corporation Tax applies to profit after allowable expenses. The small profits rate is 19% for profits under £50,000, and the main rate is 25% for profits over £250,000. Between those figures, marginal relief scales the effective rate. Both rates stay in place for the financial year starting 1 April 2026.
For most contractors billing £80,000 to £120,000 a year, profits after salary and expenses sit inside the small profits band, so 19% is the working rate. Salary, employer pension contributions, and legitimate business expenses all cut the profit figure before tax is calculated.
Expenses that commonly qualify:
- Professional indemnity, public liability, and employers’ liability premiums
- Accountancy and legal fees for the business
- Business travel: train fares, mileage (45p per mile for the first 10,000 miles, then 25p), parking, and overnight accommodation
- Equipment and software: laptops, monitors, licences
- A proportion of home costs where part of the home is used as an office
- Subscriptions to relevant professional bodies and technical publications
- Employer pension contributions paid by the company, which are fully deductible and attract no NICs
Pension contributions are worth singling out. The company can pay directly into your pension, the payment reduces Corporation Tax, and no National Insurance is triggered. For contractors with profit beyond their living needs, it is one of the cleanest ways to take value out of the company.
IR35: The Rule That Can Wipe Out the Savings
IR35, also called the off-payroll working rules, is the largest tax risk attached to a contractor limited company. It targets arrangements where a contractor works like an employee but takes payment through a company to reduce their tax bill. If a contract is judged “inside IR35,” the tax advantages of the structure largely disappear for that engagement.11GOV.UK. Understanding Off-Payroll Working IR35
Who decides depends on the client. Medium and large private sector organisations and all public sector bodies must assess the contractor’s employment status and issue a Status Determination Statement setting out their reasoning. Where the client is a small private sector company, the contractor’s own limited company makes that call.11GOV.UK. Understanding Off-Payroll Working IR35 HMRC’s CEST tool (Check Employment Status for Tax) is available to both sides, and HMRC says it will stand by determinations the tool produces as long as the input is accurate.12GOV.UK. Check Employment Status for Tax
Inside IR35, the fee-payer (usually the agency or end client) deducts income tax and employee National Insurance before paying the company, and pays employer NICs and the Apprenticeship Levy on top.11GOV.UK. Understanding Off-Payroll Working IR35 You end up taxed almost like an employee while carrying self-employment risk and getting none of the employee protections: no sick pay, no holiday pay, no employer pension contributions.
The assessment looks at the whole working relationship. Key factors include whether you can send a substitute to do the work, how much control the client has over when and how you do it, and whether you carry genuine financial risk. No single factor decides the outcome.
Annual Filings and Deadlines
Running the company means meeting a set of yearly deadlines. Miss them and penalties are automatic. Ignore them long enough and the company can be struck off.
Companies House
Annual accounts are due within nine months of the financial year-end.13GOV.UK. Preparing and Filing Companies House Accounts Most contractor companies file abbreviated micro-entity accounts. Late filing penalties for private companies start at £150 for under a month late and reach £1,500 for more than six months late, and they double if you file late in two consecutive years. In serious cases, a director can be disqualified from managing any company for up to 15 years.14GOV.UK. Company Directors Disqualification Act 1986 and Failed Companies
A confirmation statement is also due at least every 12 months, verifying that the registered address, directors, shareholders, and SIC code on record are still correct.15GOV.UK. Filing Your Companys Confirmation Statement The online fee is £50.2GOV.UK. Companies House Fees
HMRC
The Corporation Tax return (CT600) is due within 12 months of the accounting period end.16GOV.UK. Company Tax Returns – Overview The tax itself must usually be paid within nine months and one day of period end, so payment falls due before the return. Interest runs from day one on late payment, and late filing brings its own separate penalties.
If you take dividends above the £500 allowance, you also need to file a personal Self Assessment tax return.17GOV.UK. Director Information Hub – Self Assessment for Directors Self Assessment is due by 31 January after the end of the tax year, and missing it triggers an immediate £100 penalty. New contractors regularly forget this one because they assume the company’s return covers it.
Closing the Company
When you no longer need the company, there are two main routes. A voluntary strike-off is the simpler one: you apply to Companies House to dissolve the company, provided there are no outstanding debts, active agreements, or legal proceedings. Remaining assets up to £25,000 can be distributed as capital, which is taxed more favourably than income. Above that threshold, a Members’ Voluntary Liquidation involves appointing a licensed insolvency practitioner to wind the company up formally; it costs more but lets the full balance come out as a capital distribution. Leaving a dormant company on the register is possible, but the annual filing duties keep running, and the penalties for forgetting about them apply just the same.