Setting up a limited company
If you’re thinking about running your own business, one of the ways to do this is to set up a limited company. This business structure keeps your personal money separate from your business.
Here, we’ll explain what a limited company actually is, how it affects your tax, and what you need to do to set one up.
You and your business are legally different
When you set up a limited company, you’re creating something that is separate from you in the eyes of the law. Your company can own things, owe money, and agree to contracts – all in its own name, not yours.
This is different from being a sole trader, where you and your business are legally the same thing.
Key thing to remember:
A key benefit here is something called ‘limited liability’. This means that if your company runs into any money trouble, your personal belongings – your home, your car, your savings – are generally protected. You can only lose whatever money you’ve put into the business.
Your business will pay Corporation Tax
As a limited company, your business will pay something called Corporation Tax on any profits it makes. You don’t pay Corporation Tax if you’ve made a loss.
‘Profit’ is what’s left of your company’s income once you’ve taken away anything spent on running the business (the company’s expenses) – and what’s called ‘adjustments for tax’. You can find out more about Corporation Tax rates and reliefs on GOV.UK.
The amount of Corporation Tax your company will pay depends on how much profit your company makes.
You can find out more on our Getting to grips with Corporation Tax page.
You may also pay Income Tax
You’ll need to pay Income Tax on any money you take out from the business.
There are 2 main ways you can take money out:
Pay yourself a monthly salary. As well as paying Income Tax, it’s important to understand how you may also need to pay National Insurance contributions
Pay yourself something called ‘dividends’. These are a share of any profit that your business has made
You can find out more about taking money out of a limited company on GOV.UK.
There’s more admin with a limited company
Running any business means keeping clear and accurate records, but limited companies have more responsibilities.
You’ll need to file accounts (these are documents that show your company’s income, expenses and profit) with Companies House every year. And when you set up the company or make any changes to it, you need to fill in more forms for Companies House.
Each year, you’ll also need to send us a Company Tax Return to show how much Corporation Tax your company needs to pay. You need to do this even if it makes a loss or has nothing to pay.
You might also need to send us a personal tax return to show how much Income Tax and National Insurance you need to pay.
You can also find some useful info about how to keep good records for your tax returns on this page.
Helpful tip:
Many people use an accountant to help them manage all the admin.
It’s useful to know that if a bank lends money to a company, it’ll use a different process compared to a personal loan.
Getting set up
You can see a step-by-step guide to setting up a limited company on GOV.UK.
There are also quite a few forms to fill out that detail what your company can do, and how it manages its money. Keep records of these as you might be asked for them later by Companies House or us.
Most companies are ‘limited by shares’, which means they’re owned by what we call ‘shareholders’. If you’re a one-person business, you’ll probably choose to be the only shareholder – but you can add more shareholders if you want to.
Once you’ve registered your limited company, we’ll contact you about getting set up for Corporation Tax.
Key thing to remember:
You’ll need to register your limited company online at Companies House, choose a company name, appoint at least one director (which is usually you), and provide some basic information about what your business does, who the people are who own it, and where it’s based. There’s a small fee to do this.
VAT for limited companies
Value Added Tax (VAT) is a tax that’s added to the things we buy. It’s usually already included in the price. So, as a business, it’s something you’ll need to consider for any products and services you buy or sell.
You won’t need to think about VAT until your company has earned more than £90,000 as ‘turnover’ in any rolling 12-month period. Turnover is the money your business makes, before you pay any expenses or tax.
Once you reach this point, you’ll need to register for VAT and make sure you add VAT onto your products or services. For most things, the standard VAT rate is 20%.
So if you were charging your customers £100, it would now become £100 + 20% VAT, making it £120.
You can find out more about different VAT rates on GOV.UK.
You can also choose to register for VAT even if you’re not earning over £90,000.
You might choose to do this as it means you’re able to claim the VAT back on some of your business expenses, which can be useful if you’re buying expensive equipment or supplies.
You can find out more on our Value Added Tax for growing companies page.
Choosing a limited company
For many tradespeople and small business owners, the choice between becoming a sole trader or a limited company comes down to a few key questions:
How important is protecting your personal money?
Are you comfortable with more record-keeping and admin?
Do you expect your profits to grow significantly?
There’s no single right answer. Some people start as sole traders and switch to a limited company later when their business grows. Others prefer the more straightforward management of a sole trader.
Helping you make the right choice
If you’re still not sure if a limited company is right for you, it can be useful to speak to an accountant. You can talk them through your business plans, and they can help you decide which business structure fits your needs. This is an important decision.
Whether you choose a limited company, sole trader or partnership, we’re here to help fill any gaps in your knowledge so you can be tax confident and focus on your business.