Setting up a Limited Company in the UK
This article describes thoroughly setting up a limited company in the UK. We have combined information from various sources to make it as informative as possible. Please find the necessary topics from the table of contents. By clicking on a topic you will be taken to it directly. Next to each topic, you will also find a link to the Companies House (CH), the most reliable source, to find out more about that topic.
We strongly recommend to go through all the steps and read about different aspects of setting up a limited company. It’s is not necessarily the most interesting reading when you are eager to start your own business, but it will avoid problems in the future.
- Check if limited company is right for you (Check from CH)
- Choose a name (Check from CH how to choose a name)
- Choose directors (Check from CH how to choose directors)
- Decide who the shareholders or guarantors are (Check from CH how to pick shareholders)
- Identify people with significant control (PSC) over your company (Check CH for PSC requirements)
- Prepare Documents Agreeing How to Manage the Company (Check CH for documents)
- Records you have to keep (Check CH for records)
- Register your company (Register company in CH)
- Open bank account
- Corporation Tax
- Personal Income Tax
- Employers Liability Insurance
- Professional Indemnity
- Salary & dividends
- PAYE/National Insurance
Check If Limited Company Is Right for You
- is legally separate from the people who run it
- has separate finances from your personal ones
- has shares and shareholders
- can keep any profits it makes after paying tax
A Limited company is a legal person on its own. The only responsibility that the owners of the limited company have, is the debt up to the value of their initial investment.
The main disadvantages of registering a limited company are that you must also register with HMRC for corporation tax, most of your company’s information is public, People with Significant Control (PSCs) must provide a service address, accounting is more difficult and you can only remove money if you have enough profit left after the deduction of tax and other expenses before doing so, and you must follow strict procedures to remove money and pay yourself.
Choose a Name
Your company’s name has to be original and not similar to some other name already registered in the Companies House and your name must end in ‘Limited’ or ‘Ltd’.
Director of a limited company has to follow the company’s rules, shown in its articles of association, keep company records and report changes, file your accounts and your Company Tax Return, tell other shareholders if you might personally benefit from a transaction the company makes, pay Corporation Tax.
Shareholders are the proprietors of the organization and have certain rights, for example, the capacity to make changes. You can be a director and a shareholder at the same time. A limited company must have at least one shareholder who will become a director.
Identify people with significant control (PSC) over your company
Individuals who possess or control organizations are required to be recognized in the UK. The company must file the PSC information with the central public register at Companies House. The PSC register helps to increase transparency over who owns and controls UK companies and will help inform investors when they are considering investing in a company.
An officer of the company is required to:
- Identify the people with significant control (PSCs) over the company and confirm their information
- Record the details of the PSC on the company’s own PSC register within 14 days Provide this information to Companies House within a further 14 days
- Update the information on the company’s own PSC register when it changes within 14 days
- Update the information at Companies House within a further 14 days
- Confirm to Companies House that information on the public register is accurate, where it has not been updated in the previous 12 months.
Prepare Documents Agreeing How to Manage the Company
Every limited company needs these two documents:
Memorandum of association – a legal statement signed by all initial shareholders or guarantors agreeing to form the company
Articles of association – written rules about running the company agreed by the shareholders or guarantors, directors and the company secretary
Records You Have to Keep
You will have to keep all the financial and legal records. These include records of:
- directors, shareholders and company secretaries
- the results of any shareholder votes and resolutions
- promises for the company to repay loans at a specific date in the future (‘debentures’) and who they must be paid back to
- promises the company makes for payments if something goes wrong and it’s the company’s fault (‘indemnities’)
- transactions when someone buys shares in the company
- loans or mortgages secured against the company’s assets
Register Your Company
Start your application HERE in Companies House
Open a Bank Account
If you have a limited company trading in the UK, you’re obliged under the law to have a UK bank account. Let’s dive into more details on opening a UK business bank account. Read more about it from our other blog post: How to Open a Business Bank Account in the UK
As an owner of a limited company, there’s no guarantee that you’ll be familiar with every tax obligations. In simple terms, Value Added Tax is that extra fee that tops the price of services, goods, and even invoices. Most companies are not immediately registered for VAT after making it to the books. Moreover, these companies don’t need to pay or register for VAT except their annual returns surpass a certain figure.
That being said, the VAT Flat Rate Scheme (FRS) was created for smaller establishments with an annual turnover of about £150,000. What’s the need? The thing is, the scheme allows this company to pay HMRC a flat percentage of their sales. However, this depends on the industry of the company and usually amounts to less than the regular VAT rate. Regardless, it allows small companies to charge clients at 20%.
As an incentive to attract companies to register for the flat rate, owners will enjoy a 1% discount on VAT in the first year. Moreover, you have to pay HMRC a percent of your turnover instead of working out the VAT on every purchase. Your company can take up what’s left when you do the difference. This happens when you come to balance your VAT.
One thing you should consider when registering for the VAT Flat Rate Scheme is affirming if your business clients are also registered for VAT. You have to ensure that the additional fee they are paying doesn’t have a punishing impact on their finances. You don’t want to start losing your clients.
To calculate you give to HMRC regarding your return, do well to deduct the VAT you pay on your expenses from the one you charge on invoices. The difference sums up what you owe.
Besides the VAT, you need to register your limited liability company for Corporation Tax. Corporation tax is added to your company’s gains immediately after you pay your employees’ salaries. This addition comes up before you can withdraw dividends as a major shareholder.
All limited liability companies must submit CT600 yearly and are obliged to pay tax on their profits. Significantly, the first tax return after establishing your company should be filed within 12 months of your company’s first year. Moreover, payment should be made within nine months plus one day at the end of your company’s year.
We advise that you sort out your tax business sooner, rather than positioning it. Be sure to submit the form in time. Please note however that these are merely the main taxes you will be obligated to, you may be subject to pay other taxes.
Personal Income Tax
Your company will pay its corporation tax. But that is not where it ends for tax, you personally are liable to pay tax on the income you earn, income usually comes in the form of salary and dividends from your company.
When completing your company’s return online you are required to fill a Self Assessment by the 31st of January which follows your tax year. When posting your Self Assessment, you are liable to submit it by 31st October, the exact year to the tax year.
Be sure to register with HMRC and inform them that you have to pay personal tax. It’s quite easy to do so, you can pay for their website.
Employers Liability Insurance
If you are employing people in your limited company, you have to pay the employer’s liability insurance. This insurance protects company owners against claims brought forward an employee for injury and other unforeseen events. However, in case you’re the only employee of the company, and you also possess over 50% of the shares, you are not obligated to have this insurance cover.
Public liability seeks to insure you against damage or death to a third party and their property when your actions lead to the event. Although you’re not under any compulsion to opt for public liability, you have an obligation to safeguard anyone who is affected via your services.
This covers you against claims made against your profession or work, especially as a result of your negligence.
Moreover, it’s best you also consider Tax Investigation Insurance. It insurance against the finances incurred during a potential investigation by HMRC into your limited company. This insurance is important because the investigation will eat up significant time and money.
To accept payment for the services your company offers, it’s best that you raise an invoice and issue to your clients.
Now, there are some legal guidelines you have to follow when making an invoice. There are also numerous requirements that should be present to validate the invoice. Significantly, it should possess the word ‘invoice’, and the following:
- The invoice number. If you’ve registered for VAT this number must be in sequence and should begin with the number next to one that ended the last invoice.
- Name of company, business address, and registration number (appears on the Certificate of Incorporation you were issued).
- Client’s name/address.
- A detailed description of the goods or services provided.
- The date or time of supply (that is, the tax point) if different from the date on the invoice.
- Supply an itemized description that shows the unit price before and after VAT. Also, show the rate of VAT, the amount payable and the final VAT charged.
- Include the payment terms. This helps your client knows when the payment is for and informs them about how to make the payment. To achieve this, we created have some invoice templates, that have all the information fields you need. Click here to download without cost.
Please note that expenses must be ‘wholly and exclusively’ used for business. The thing is, you can hit the rocky paths when you begin to spend personal expenses for the business. The cumulative cost of your expenses is usually removed from the revenue which you can be taxed from. For instance, if your profit is £10,000 and your business expenses is worth £1,500, you are only obligated to pay £8,500 as the corporation tax of your company’s revenue.
Kindly note that this is merely an isolated tax example to show how expenses determine your tax fee. In reality, your tax bill will give room to VAT flat rate, PAYE salaries, and income thresholds.
Any expense that functions for two purposes will not be accepted because it’s not solely for business use. So, buying a suit for work which you will likely use personally is not going to work in this case, but purchasing a specialized outfit needed on a building site is.
However, you can claim personal expenses for business needs that were incurred before or during the establishment of your limited company.
Salary & Dividends
Your business profits are solely the property of your limited company. If you want to withdraw an income from the firm, you have to go through either dividend if you own the company, or a salary if you’re an employee.
While functioning as both an owner (or shareholder) and employee (director) of the limited company, you can build the most tax-efficient way to get an income. You can split your payments between dividend and salary, by doing the following:
If your company falls out of the IR35 legislation, you can earn a salary at either, the level below the Tax-free thresholds and NIC, or in line with the American minimum wage.
Have it at the back of your mind that the national minimum wage does not necessarily apply to companies that do not have a contract with their employees, this will be the case for one-man companies. Note that the most tax-efficient allowance or salary that you can pay you largely depends on the tax year. The reason is that income and NIC tax bands fluctuate yearly because of inflation.
Dividends signify the money you can withdraw from the after-tax profits of the limited company as a shareholder. Ensure that your company has available profits that can let you withdraw dividends, if not money paid would be named as director’s loan.
Although dividends bypass National Insurance taxes, they are prone to Corporation Tax. Moreover, until your salary or income scales over the higher rate tax threshold, dividends will be taxed at a much lower rate. However, the tax controllers know that it would be unfair to tax this income twice, do well to claim a tax credit on this amount. You can utilize our Personal Tax Estimator to discover the most tax-efficient combination of dividend and salary.
If you plan to pay salaries, you are obligated to create a Pay As You Earn (PAYE) scheme with HM Revenue & Customs (HMRC). You need to also take out all National Insurance liabilities. Failure to do this within the given time frame or properly can cost you financial penalties.
What is PAYE? it’s a compulsory means of taxation where you need to remove an amount from staff salaries. PAYE is applied to those who earn an annual salary that’s more than the Employee National Insurance Threshold. You need to notify the HMRC whenever you pay an employee. The process will be handled by Crunch software which complies with RTI.
For further details and inquiries on RTI, do well to visit HMRC’s website. The salary you have to pay largely depends on you, but you have to consider tax benefits involved in paying under the minimum thresholds for taxable dividends and salaries.
IR35 legislation serves as a barrier that helps prevent permanent employees from disguising themselves as limited companies or self-employed to enjoy lower tax benefits.
Although this legislation confuses people, it is straightforward to use. It functions to determine if you are employed in the position of an employee, or you retain your role as a contractor while you provide your services to your client.
IR35 examines how much involvement a client has in operating your company and how much regulation hovers around your work. You are the sole authority in your limited company and the way you work should be answerable to you.
It is not actually hard to set up a limited company in the UK. It is rather convenient and fast if you have done your research and you are the only owner and director of the company at the same time. Yes, it is a bit more complicated if you have multiple shareholders and you need to decide your roles in the company, but still, you can do it!