Setting Up a Limited Company for Contracting in 2026/27

Most "how to set up a limited company" guides are written for someone starting a coffee shop. This one is written specifically for UK contractors who need to be invoicing within 2–3 weeks and don't want to end up with a badly-configured company that costs money to unpick later.

Here's the actual sequence, the numbers, and the decisions that matter.

Is a limited company even the right vehicle?

Before setting one up, be honest about whether you need it. A PSC is the right structure if:

• You expect the contract to be outside IR35, OR
• You're running multiple concurrent clients with a mix of statuses, OR
• You want the option to keep money in the business for pension contributions, timing, or cash-flow reasons, OR
• You value the limited liability protection for professional risk reasons.

A PSC is the wrong structure (or overkill) if:

• You're taking a single inside-IR35 engagement and going back to permanent employment straight after. An umbrella company is cleaner and cheaper.
• Your engagement is short (under 3–6 months) and low-value. The setup and accountancy costs eat too much of the take-home.

If in doubt, read the PSC vs Umbrella decision framework before committing. The rest of this guide assumes you've made the call and want to get set up.

The setup sequence — do it in this order

The correct sequence saves days of avoidable delays. Doing steps in the wrong order (e.g. applying for VAT before you have a business bank account) will produce paperwork mismatches you'll spend a week untangling.

1. Companies House incorporation — day 1
2. Business bank account application — day 1–2
3. Choose an accountant — day 2–4
4. HMRC corporation tax, PAYE registration — day 5–7 (accountant usually handles)
5. VAT registration (if applicable) — day 7–10
6. Business insurance — before you start work

Step 1: Companies House incorporation

The single mandatory step. You can do this directly at Companies House for £50 online and it usually completes within 24 hours. Alternatively, many accountancy firms include free incorporation as part of onboarding.

What you'll need to decide:

• Company name. Must be unique on the Companies House register, must end in "Limited" or "Ltd", and can't contain restricted words without permission. Check availability first via the Companies House search.
• Registered office address. This becomes public. Options: your home address (cheap but public), an accountant's address (often included in their monthly fee), or a virtual office service.
• Director(s) and shareholder(s). For a single-contractor PSC, you're both. If your spouse is going to work in the business too (which unlocks the Employment Allowance — see the salary vs dividends guide), decide on this at incorporation.
• Share structure. A single share of £1 held by one director is the standard contractor setup. Two shares if you're splitting with a spouse. Anything more complex needs accountant advice up front to avoid future SDLT or capital gains issues.
• SIC code. Standard Industrial Classification. For IT contractors, 62020 (Information technology consultancy activities) or 62012 (Business and domestic software development) are the usual codes. Consulting engineers use 71121. It's not fatal to get this wrong — you can change it later.

Step 2: Business bank account

You must have a separate business bank account. Mixing personal and business money in a personal account creates HMRC and Companies Act problems.

The banking market for UK contractor PSCs has consolidated around a few options:

• High-street banks (Barclays, HSBC, Lloyds, NatWest). Usually free for the first 12–24 months, then £5–£10/month. Slower to approve (2–4 weeks). Established, boring, works.
• Challenger banks (Tide, Starling, Revolut Business, Wise Business). Faster to approve (often 1–3 days), usually free for basic tiers, better mobile apps. Some limitations on cash deposits and cheques — usually not a contractor issue.
• NatWest / Mettle deserves a specific mention because it includes free access to FreeAgent accounting software as part of the business current account — a substantial value for contractor bookkeeping.

You don't need the perfect bank — you need a working bank account by end of week 1. Pick whichever one has the fastest approval for your circumstances and switch later if needed.

Step 3: Choosing an accountant

This is the single most important decision on the setup path. The right contractor accountant pays for themselves multiple times over in tax optimisation and time saved. The wrong one wastes both.

What good contractor accountants look like:

• Contractor-specialist, not general SME. The tax rules for outside-IR35 PSCs are specialist — salary/dividend optimisation, off-payroll working, expense apportionment, umbrella comparison. General accountants often get these wrong.
• Fixed monthly fee, not hourly. Standard rate is £100–£150/month for a single-director PSC. Should include incorporation (if not already done), Companies House filings, corp tax return, self-assessment, quarterly bookkeeping check, and unlimited email queries.
• Cloud accounting software included. Any decent contractor accountant will run everything through cloud software so you can see your numbers in real time. The three main options in the UK contractor market are QuickBooks, FreeAgent, and Xero — all three handle PAYE, VAT, dividends and self-assessment cleanly.
• IR35 review capability. The accountant should either offer IR35 contract reviews themselves or partner with a specialist. Handy when a new engagement's status is unclear — see the IR35 contract reviews guide.
• Reasonable response time. Two working days for a query is normal. If you're waiting a week for basic answers, they're overloaded.

Should you do your own accounts?

Some contractors do. It's possible with cloud software plus disciplined bookkeeping. Realistically most contractors shouldn't:

• The time cost is 4–8 hours per month of billable time you're not billing.
• The tax optimisation opportunities (salary split, pension, expense timing, dividend planning) are worth more than the accountancy fee if a specialist handles them.
• The risk of HMRC-facing errors (missed deadlines, wrong classifications, illegal dividends) creates penalty exposure that dwarfs the fee.

The exception: highly numerate contractors on lower day rates where the accountancy fee is a larger fraction of income. Even here, most eventually outsource.

Step 4: HMRC registrations

Your accountant usually handles all of these. If you're going DIY, the sequence:

• Corporation tax: automatic once Companies House incorporates you. HMRC sends a UTR (Unique Taxpayer Reference) to your registered office within 2–3 weeks.
• PAYE scheme: required before paying yourself a salary. Register via HMRC's online PAYE registration — takes 5–10 working days to get the PAYE reference and Accounts Office reference back.
• Employer's Liability insurance: legally required as soon as you have any employee, including yourself as director if you're taking a salary. See step 6.

Step 5: VAT registration — the Flat Rate question

You must register for VAT once your rolling 12-month turnover hits £90,000. For a typical outside-IR35 contractor on £400+/day, that's inevitable within a few months, so most register from day one.

Once registered, you have two schemes to choose from:

• Standard VAT accounting. Charge 20% VAT on your invoices, reclaim VAT on business purchases, pay the difference to HMRC quarterly. Suits contractors with meaningful VATable purchases (equipment, software subscriptions, business travel).
• Flat Rate Scheme (FRS). Charge 20% VAT to clients as normal but pay HMRC a flat percentage of the VAT-inclusive turnover. For "management consultancy" and most IT contractor SIC codes, the flat rate is 14.5% (or 15.5% if you're classified as a "limited cost trader" — check yours). You keep the difference as extra margin.

Historically the Flat Rate Scheme was a small but reliable earner for contractors — roughly £1,500–£3,000/year of extra margin depending on turnover. The 2017 changes tightened it substantially by introducing the limited-cost-trader test, which pushed many contractors onto the higher 16.5% rate that wipes out most of the benefit.

The maths for 2026/27: run both schemes through a spreadsheet with your expected annual turnover and VATable purchases. Your accountant can do this in ten minutes. For most contractors under the limited-cost test, the FRS still saves £500–£1,500/year. For those over the limited-cost-trader threshold, standard VAT is usually better.

Step 6: Business insurance

Three insurances that outside-IR35 contractors usually need:

• Professional Indemnity (PI): covers you against professional errors and negligence. Most clients contractually require it — often £1m minimum, sometimes £2m or £5m. Typical cost: £100–£400/year for a solo IT contractor at £1m cover.
• Public Liability: covers you against third-party injury or property damage. Usually bundled with PI. Trivial cost.
• Employer's Liability: legally required if you have any employee, including yourself as a director on a salary. £10m minimum cover. Trivially cheap.

The three are usually bundled into a single "contractor insurance" policy from specialist providers like Kingsbridge, Hiscox, or Qdos. Around £300–£500/year total is normal for basic cover.

Step 7: Payroll setup and running the numbers

Once PAYE is registered, you need to actually run the payroll. Your accountant will do this monthly — typically it's a single Real Time Information (RTI) submission to HMRC before you pay yourself the salary each month.

The standard contractor setup for 2026/27:

• Salary: £12,570/year (the personal allowance) unless you have Employment Allowance eligibility — details in the salary vs dividends guide.
• Dividends: declared periodically from post-corp-tax profits. Requires board minutes and dividend vouchers.
• Pension contributions: employer contributions directly from the company — the most tax-efficient extraction route above the personal allowance salary and the basic-rate dividend band.

The mistakes new contractor PSCs make

• Setting up too complex a share structure. A single £1 ordinary share held by the director is fine. Multiple share classes at incorporation for "flexibility" usually cause more problems than they solve.
• Delaying VAT registration to save on paperwork. Delays cost 15–16.5% of missed FRS margin from month 1 onwards. Register from day one unless the accountant advises otherwise.
• Choosing accountancy based on price alone. The cheapest £60/month accountant will cost you far more in unclaimed tax reliefs and missed deadlines than the £150/month specialist.
• Mixing personal and business expenses. Even small drift creates HMRC issues. Use the business card for business, personal card for personal, always. Cloud accounting software makes this easy to enforce.
• Not putting corporation tax aside. Every £1 of profit in your business account carries a 19–25% corp tax debt to HMRC. Set up a separate "tax reserve" account and move the corp tax provision across monthly. Contractors who don't do this end up short at year-end.
• Ignoring IR35 from day one. The status of your first engagement determines whether the PSC framework works. Read the inside vs outside IR35 explainer before you sign your first contract.

What the first three months actually look like

• Month 1: setup, first client contract signed, first invoice raised. Cash flow deliberately negative because setup costs precede first invoice.
• Month 2: first invoice paid (assuming standard 30-day terms), first PAYE run, first VAT return period starts.
• Month 3: first "normal" month. Regular monthly cadence establishing itself. First quarterly VAT return due if you registered from day one.

By month 4, the paperwork rhythm is set and the company essentially runs itself with your accountant's monthly touch. From then on, the setup work is behind you and the ongoing work is invoicing, deposit tracking, and periodic decisions about dividends and pension contributions.

The honest bottom line

Setting up a contractor PSC in 2026/27 is straightforward if you follow the order and don't overthink the share structure. Companies House takes 24 hours, banking takes 1–5 days, HMRC takes a couple of weeks, and the whole thing costs under £100 up-front and about £1,500–£2,000 a year to run (accountant + insurance + trivial software).

The best money you'll spend on the setup is a proper contractor-specialist accountant. The worst money you'll save is trying to save it there.