Complete Guide to Setting Up a Limited Company in the UK (2025)

Why Set Up a Limited Company in the UK?

Before diving into the setup process, it's important to understand the benefits and responsibilities of operating as a limited company:

Key Advantages:

• Tax Efficiency: Limited companies pay Corporation Tax at 19% (for profits up to £50,000) or 25% (for profits over £250,000), which can be lower than personal income tax rates of 20-45%. Directors can take a low salary and receive dividends, which are taxed at lower rates (8.75% basic rate, 33.75% higher rate).
• Limited Liability Protection: Your personal assets (home, savings) are protected if the company faces financial difficulties or legal claims. Creditors can only pursue company assets, not your personal wealth.
• Professional Image: Operating as "Ltd" or "Limited" can enhance credibility with clients, suppliers, and potential investors.
• Better Access to Finance: Limited companies often find it easier to secure business loans, overdrafts, or investment capital compared to sole traders.
• Tax Planning Flexibility: You can control when and how you extract profits, allowing for strategic tax planning around allowances and thresholds.
• Pension Contributions: Company pension contributions are tax-deductible, reducing Corporation Tax while building your retirement fund.

Responsibilities to Consider:

• Annual Filing Requirements: You must file annual accounts and a confirmation statement with Companies House.
• Corporation Tax Returns: Annual Corporation Tax returns must be filed with HMRC.
• Record Keeping: More detailed accounting records are required compared to sole traders.
• Public Disclosure: Company information (directors, shareholders, accounts) is publicly available on Companies House.
• Administrative Costs: Accountancy fees and filing costs are typically higher than for sole traders.

Step 1: Choose Your Company Name

Your company name is your business identity, so choose carefully. Here's what you need to know:

Naming Rules and Restrictions:

• Must End with "Limited" or "Ltd": All UK limited companies must include this suffix (or Welsh equivalents "Cyfyngedig" or "Cyf").
• Must Be Unique: Your name cannot be identical to an existing company name on the Companies House register. Use the Companies House name checker to verify availability.
• Sensitive Words: Certain words require approval from relevant bodies (e.g., "Royal," "Bank," "Insurance"). Check the full list of sensitive words.
• Cannot Be Offensive: Names that are offensive, misleading, or suggest illegal activity will be rejected.
• Cannot Suggest Government Connection: Avoid names that imply government or public authority affiliation unless authorized.

Tips for Choosing a Good Company Name:

• Make it memorable and easy to spell
• Consider your target market and industry
• Check if the domain name is available
• Think about future expansion - will the name still work if you diversify?
• Consider trademark availability

Step 2: Choose Your Company Structure

Before registering, decide on your company's structure:

Private Limited Company (Ltd):

• Most common structure for small businesses
• Shares cannot be sold to the public
• Minimum one director and one shareholder (can be the same person)
• No minimum share capital requirement
• Ideal for freelancers, contractors, and small businesses

Public Limited Company (PLC):

• Can sell shares to the public
• Requires minimum £50,000 share capital
• More complex regulations and reporting requirements
• Typically used by larger businesses planning to raise capital

Limited Liability Partnership (LLP):

• Hybrid between partnership and limited company
• Partners have limited liability but taxed as partnerships
• Requires at least two designated members
• Common for professional services firms

Step 3: Appoint Directors and Shareholders

Every limited company must have at least one director and one shareholder:

Director Requirements:

• Minimum Age: 16 years old
• Not Disqualified: Cannot be an undischarged bankrupt or disqualified director
• Responsibilities: Directors are legally responsible for running the company, filing accounts, and ensuring compliance with company law
• Can Be a Shareholder: Directors can also be shareholders (most common in small companies)

Shareholder Information:

• Minimum: At least one shareholder required
• Can Be a Director: Same person can be both director and shareholder
• Share Classes: You can issue different classes of shares (ordinary, preference, etc.) with different rights
• Initial Share Capital: Most companies start with £1 share capital divided into shares (e.g., 100 shares at £0.01 each)

Step 4: Register Your Company with Companies House

You can register your company online, by post, or through a formation agent:

Option 1: Online Registration (Recommended)

• Cost: £12 (paid by debit/credit card)
• Processing Time: Usually completed within 24 hours (often same day)
• How to Register:
  1. Visit the GOV.UK company formation page
  2. Create a Companies House account
  3. Complete the online form with company details
  4. Pay the £12 fee
  5. Receive your certificate of incorporation (usually within 24 hours)

Option 2: Register by Post

• Cost: £40
• Processing Time: 8-10 working days
• Forms Required: IN01 form (available on GOV.UK)

Option 3: Use a Formation Agent

• Many accountants and company formation services can register on your behalf
• Costs vary but often include additional services (registered office, mail forwarding)
• Can save time and ensure everything is completed correctly

Information Required for Registration:

• Company name
• Registered office address (must be in the UK and can receive mail)
• Director details (name, date of birth, nationality, occupation, service address)
• Shareholder details (name, address, number of shares)
• Share capital details
• Standard Industrial Classification (SIC) code (describes your business activity)
• Statement of capital
• People with significant control (PSC) information (usually the shareholders)

Step 5: Set Up Your Registered Office Address

Your registered office address is where official documents will be sent and must be displayed on all company correspondence:

Requirements:

• Must be a physical address in the UK (not a PO Box)
• Must be able to receive mail during business hours
• Will be publicly available on Companies House
• Can be your home address, business premises, or a service address (if using a formation agent)

Options:

• Your Home Address: Free but publicly visible - consider privacy implications
• Business Premises: Ideal if you have a dedicated office
• Service Address: Many formation agents offer this service for a small annual fee

Step 6: Register for Corporation Tax with HMRC

After incorporation, you must register for Corporation Tax within 3 months of starting business activities:

How to Register:

• HMRC will usually send you a letter with your Unique Taxpayer Reference (UTR) after Companies House notifies them
• If you don't receive this, register online at GOV.UK
• You'll need your company registration number and incorporation date

Corporation Tax Rates (2024/25):

• Small Profits Rate: 19% for profits up to £50,000
• Main Rate: 25% for profits over £250,000
• Marginal Rate: Graduated rate between £50,000 and £250,000

Step 7: Register for VAT (If Applicable)

You must register for VAT if your annual turnover exceeds £90,000 (2024/25 threshold):

When to Register:

• Mandatory: If turnover exceeds £90,000 in any 12-month period
• Voluntary: You can register even if below the threshold (may be beneficial for reclaiming VAT on expenses)

VAT Schemes Available:

• Standard VAT Scheme: Charge 20% VAT, reclaim on purchases
• Flat Rate Scheme: Pay a fixed percentage of turnover (simpler but may cost more)
• Cash Accounting Scheme: Pay VAT when customers pay you (helps cash flow)

Step 8: Set Up a Business Bank Account

While not legally required, a separate business bank account is essential for proper record-keeping:

Benefits:

• Clear separation of business and personal finances
• Easier accounting and tax preparation
• Professional image when paying suppliers
• Simplified HMRC compliance

What You'll Need:

• Certificate of incorporation
• Memorandum and Articles of Association
• Proof of identity for directors
• Proof of registered office address

Step 9: Understand Your Ongoing Obligations

Once your company is set up, you have ongoing responsibilities:

Annual Filing Requirements:

• Confirmation Statement: Must be filed annually (previously called Annual Return) - £13 online
• Annual Accounts: Must be filed with Companies House within 9 months of year-end
• Corporation Tax Return: Must be filed with HMRC within 12 months of year-end
• Corporation Tax Payment: Due 9 months and 1 day after year-end

Record Keeping:

• Maintain accurate accounting records
• Keep minutes of board meetings
• Maintain register of directors and shareholders
• Keep records of all company transactions

Step 10: Plan Your Tax Strategy

Once your company is operational, consider these tax-efficient strategies:

Salary vs Dividends:

• Take a low salary (around £9,100-£12,570) to avoid National Insurance but maintain state pension entitlement
• Extract remaining profits as dividends (taxed at 8.75% basic rate, 33.75% higher rate)
• Use our Dividends vs Salary Calculator to find the optimal mix

Pension Contributions:

• Company pension contributions are tax-deductible
• Up to £60,000 annual allowance (2024/25)
• Reduces Corporation Tax while building retirement savings

Expense Claims:

• Claim all allowable business expenses
• Use Annual Investment Allowance (AIA) for equipment purchases
• Consider Research & Development (R&D) tax relief if applicable

Common Mistakes to Avoid

• Not Registering for Corporation Tax: Must register within 3 months of starting business
• Mixing Personal and Business Finances: Always use a separate business bank account
• Missing Filing Deadlines: Late filing results in penalties and fines
• Not Keeping Proper Records: Inadequate records make tax returns difficult and can trigger HMRC investigations
• Choosing the Wrong Year-End: Consider timing for tax planning (e.g., 31 March aligns with tax year)
• Not Understanding IR35: If contracting, ensure you understand IR35 rules to avoid unexpected tax bills

Getting Professional Help

While you can set up a company yourself, professional help can be invaluable:

When to Use an Accountant:

• Complex tax situations
• Multiple shareholders or directors
• Uncertainty about tax obligations
• Need for ongoing tax planning advice
• Time constraints

What an Accountant Can Help With:

• Company formation
• Tax planning and optimization
• Annual accounts preparation
• Corporation Tax returns
• VAT registration and returns
• Payroll setup (if employing staff)

Next Steps

Now that you understand the company setup process:

• Use our Sole Trader vs Limited Company Calculator to see if incorporation makes financial sense for you
• Check out our Company Structuring Guide for advice on optimizing your company structure
• Read our Guide to Taking Money Out of Your Company for tax-efficient profit extraction strategies
• Visit our FAQ page for answers to common questions