Index of the Article:
7️⃣ FAQs
The Audio Summary of the Key Points of the Article
Understanding the Basic Costs of Setting Up a Limited Company in the UK
Starting a limited company in the UK comes with several mandatory and optional costs, and these can vary based on how you choose to register your company, whether you hire professional services, and what additional legal or accounting support you need. In this section, we will break down the main costs associated with forming a limited company, including government fees, professional services, and other initial expenses.
1.1 The Official Cost of Registering a Limited Company
The very first expense you’ll encounter when setting up a limited company is the registration fee with Companies House. You can register your company in different ways, and each method has its own cost.
Registration Method | Cost | Processing Time | Where to Apply |
Online registration (via GOV.UK) | £12 | Usually within 24 hours | Companies House online service |
Postal registration (via form IN01) | £40 | Takes 8-10 days | Send form IN01 to Companies House |
Same-day registration (by post) | £100 | Same day, if received before 3 pm | Send a request with "Same Day" written on the envelope |
Using a formation agent | Varies from £15 to £200+ | Varies (can be same day in many cases) | Private company formation services |
For most businesses, online registration at £12 is the cheapest and fastest option. However, if you need additional services such as setting up a business bank account, VAT registration, or an official registered address, a company formation agent can handle everything for you at an additional cost.
1.2 Do You Need a Business Bank Account?
While it is not legally required for a limited company to have a business bank account, it is highly recommended because a limited company is a separate legal entity from its owners.
Business bank account costs in the UK (as of 2025):
Bank Name | Monthly Fee | Transaction Fees | Special Offers |
Starling Bank | £0 | Free UK payments | Free account setup |
Monzo Business | £5/month (Lite version free) | Free transfers | Free for 6 months |
HSBC Kinetic | £6.50/month | Free for first 12 months | |
Lloyds Business Account | £7/month | Free for first 12 months | |
Barclays Business Account | £8/month | Free for first 12 months |
While some digital banks like Starling and Monzo offer free accounts, traditional banks may charge a small fee but provide access to business loans and other financial services.
1.3 Essential Legal and Compliance Costs
Once your company is registered, there are legal and compliance requirements that may incur additional costs:
Registered Office Address (£0 - £200/year)
Every UK limited company must have a registered office address in the UK.
If you work from home, you can use your home address for free, but this means your address is publicly visible on the Companies House website.
Many businesses use a virtual office service for £50-£200 per year to keep their address private.
Company Secretary (Optional, £0 - £300/year)
A company secretary is not legally required for most small businesses.
However, if you prefer to outsource this role, you can hire one for £150-£300 per year.
Confirmation Statement (£13-£40 per year)
Every UK limited company must file a confirmation statement with Companies House every 12 months.
Online filing: £13
Paper filing: £40
Business Insurance (£50-£500 per year)
Business insurance is not mandatory unless you have employees (then you must get Employer’s Liability Insurance).
The most common types of insurance include:
Public liability insurance (from £50/year)
Professional indemnity insurance (from £100/year)
Employers’ liability insurance (£200-£500/year)
1.4 Do You Need an Accountant?
Many business owners wonder whether they need an accountant when starting a limited company. The answer depends on how comfortable you are with managing finances and tax filing.
Accounting Method | Cost | Pros | Cons |
DIY Accounting | Free (or software cost) | No extra costs, full control | Time-consuming, risk of errors |
Accounting Software | £10-£40/month | Automated calculations, easy to use | Subscription cost |
Hiring an Accountant | £50-£300/month | Saves time, tax-efficient advice | Ongoing costs |
If you have a simple business, using accounting software like QuickBooks, Xero, or FreeAgent (£10-£40 per month) can help with bookkeeping and tax filings.
If your business is complex, hiring an accountant for £50-£300 per month might be a better choice.
1.5 Additional Costs You Might Encounter
Apart from the registration fee, bank account, and compliance costs, here are some additional expenses to consider:
Expense | Cost Estimate | Is It Mandatory? |
Domain Name & Website | £10-£100 per year | No, but recommended |
Office Space or Co-Working | £50-£500 per month | No |
Business Email & Hosting | £3-£15 per month | No |
Marketing & Branding | £50-£1000+ | No |
If you plan to run a fully online business, you may need to buy a domain name (around £10-£20/year) and hosting services.
If you want a physical workspace, co-working spaces start from £50/month.
1.6 Total Estimated Cost of Setting Up a Limited Company
The total cost of setting up a limited company depends on what services you need. Here’s a breakdown based on different setups:
Type of Business Setup | Estimated Cost (First Year) |
Bare Minimum (DIY registration, no accountant, using home address) | £12 - £50 |
Standard (Registered address, business bank account, basic insurance, accounting software) | £100 - £500 |
Professional (Using an accountant, virtual office, insurance, website & marketing) | £500 - £2000+ |
For most small businesses, the realistic cost of setting up a limited company in the UK is around £100-£500 in the first year. If you want additional professional services, the cost can go up to £2000 or more.
Understanding the Ongoing Costs of Running a Limited Company in the UK
Setting up a limited company in the UK comes with an initial cost, but the financial commitment doesn’t end there. Once your company is registered, you will have to maintain compliance with HMRC and Companies House, pay relevant taxes, and possibly cover additional costs like payroll, VAT, and pension contributions.
2.1 Annual Compliance and Filing Costs
Every limited company in the UK has to file certain documents every year to stay legally compliant. Failing to do so on time can result in penalties or even company dissolution. Here are the key compliance costs:
Confirmation Statement (Annual Filing Fee)
Cost: £13 (online) or £40 (paper filing)
When: Once every 12 months
Where to file: Companies House website
This statement confirms your company details (e.g., directors, shareholders, registered address). It’s a simple form, but you must file it every year or risk fines.
Annual Company Accounts Filing (Mandatory)
Cost: Free if you file it yourself, but £150-£1000+ if done by an accountant
When: Within 9 months of the company’s financial year-end
Where to file: Companies House website
If your company is a small business (turnover under £10.2 million), you may qualify for simplified “micro-entity” accounts, which can be filed easily online.
Corporation Tax Return (CT600 Form)
Cost: Free if you file it yourself, or £300-£1000+ via an accountant
When: Every year, within 12 months of your financial year-end
Where to file: HMRC website
If your annual profits exceed £50,000, you must file this return and pay corporation tax.
2.2 Corporation Tax – The Biggest Ongoing Cost
Every limited company in the UK is required to pay corporation tax on its profits.
How Much Is Corporation Tax in 2025?
Profits up to £50,000: 19%
Profits over £250,000: 25%
Profits between £50,000 - £250,000: Between 19% and 25% (marginal relief applies)
Example Calculation:
Annual Profit | Corporation Tax Rate | Tax Due |
£30,000 | 19% | £5,700 |
£75,000 | Marginal relief applies | ~£15,000 |
£300,000 | 25% | £75,000 |
Corporation tax must be paid within 9 months after your financial year ends, or you will face penalties.
2.3 Payroll Costs (If You Pay Yourself or Employees)
If your limited company has employees (including yourself as a director), you need to run a PAYE (Pay As You Earn) payroll system.
Key Payroll Costs:
Salary Payments – You decide how much to pay yourself/employees.
Employer’s National Insurance Contributions (NICs):
13.8% on salaries above £9,100 per year (2024/25 rate).
Payroll Software or Accountant Fees:
Free (if using HMRC’s Basic PAYE Tools)
£10-£50/month for payroll software
£50-£200/month if outsourced to an accountant
Example: Payroll Costs for a Small Business
Expense | Cost Estimate |
Employee Salary | £25,000 per year |
Employer’s NICs | £2,196 |
Payroll Software | £10/month |
Accountant for Payroll | £50-£150/month |
For small businesses, payroll costs can range from £50/month (DIY) to £200+/month (if outsourced).
2.4 VAT (Value Added Tax) – Do You Need to Register?
If your business has a turnover over £90,000 (2024/25 threshold), you must register for VAT.
VAT Registration Costs:
Free to register on the HMRC website
Accountant costs: £200-£1000/year if outsourced
VAT Rates:
VAT Type | Rate |
Standard VAT | 20% |
Reduced VAT (e.g., fuel, children’s car seats) | 5% |
Zero-rated VAT (e.g., most food, books, newspapers) | 0% |
Example VAT Calculation (Standard Rate 20%)
If your company’s annual revenue is £120,000, VAT at 20% means:
You charge customers an extra £24,000 in VAT
You pay VAT to HMRC but can reclaim VAT on business expenses
If your turnover is under £90,000, VAT is optional, but it might be beneficial if you have a lot of VAT-eligible business expenses.
2.5 Business Insurance (Mandatory for Some Companies)
While business insurance is not legally required for all businesses, you must get Employers’ Liability Insurance if you have employees.
Type of Insurance | Estimated Cost (Annual) | Mandatory? |
Public Liability Insurance | £50-£300 | No (but recommended) |
Professional Indemnity Insurance | £100-£500 | No (for consultants, lawyers, etc.) |
Employers’ Liability Insurance | £200-£500 | Yes (if you have employees) |
For most small businesses, basic insurance costs around £100-£500 per year.
2.6 Accounting and Bookkeeping Costs
Managing company accounts can be time-consuming, so many businesses hire an accountant.
Accounting Service | Estimated Cost (Annual) |
DIY Accounting (using software) | £100-£500 |
Hiring a Small Business Accountant | £500-£2,000 |
Full-Service Accounting Firm | £2,000+ |
Popular accounting software options:
Xero, QuickBooks, or FreeAgent (£10-£40/month)
Hiring an accountant (£50-£300/month)
For small businesses, basic accounting and tax filing costs start from £500 per year.
2.7 Total Estimated Ongoing Costs for a Limited Company
Ongoing Expense | Cost Estimate (Annual) |
Corporation Tax (on £50,000 profit) | ~£9,500 |
Confirmation Statement | £13 |
Annual Accounts (if using an accountant) | £300-£1,000 |
Payroll (for one employee) | £500-£3,000 |
VAT Filing (if applicable) | £200-£1,000 |
Business Insurance | £100-£500 |
Total (Small Business Estimate) | £1,000 - £5,000+ |
Hidden and Unexpected Costs of Running a Limited Company in the UK
Starting a limited company in the UK comes with many expected costs, such as registration fees, taxes, and accounting expenses. However, many new business owners underestimate the hidden and unexpected costs that can arise when running a company. These costs can catch you off guard and impact your cash flow and profitability.
3.1 Penalties for Late Filings and Non-Compliance
Failing to submit required documents on time can result in penalties from Companies House and HMRC. These fines increase the longer you delay, making it crucial to stay on top of deadlines.
Companies House Late Filing Penalties
Every limited company must file annual accounts and a confirmation statement with Companies House. If you miss the deadline for filing your annual accounts, you will face the following penalties:
Days Late | Penalty for a Private Company | Penalty for a PLC (Public Company) |
Up to 1 month | £150 | £750 |
1 to 3 months | £375 | £1,500 |
3 to 6 months | £750 | £3,000 |
More than 6 months | £1,500 | £7,500 |
If you fail to file at all, Companies House can dissolve your company and remove it from the register.
Corporation Tax Late Payment Penalties
HMRC imposes hefty fines if you do not pay your corporation tax on time.
Days Late | Penalty |
1 day late | Interest charged at HMRC's late payment rate |
6 months late | 5% of the unpaid tax |
12 months late | Additional 5% of the unpaid tax |
To avoid these fines, always file and pay on time. If you cannot afford to pay, you can contact HMRC to arrange a Time to Pay Agreement.
VAT Late Payment Penalties
If you are VAT-registered and fail to pay your VAT bill, you could face the following penalties:
Days Late | Penalty |
1-15 days late | No penalty (unless late repeatedly) |
16-30 days late | 2% of the VAT due |
31+ days late | Additional 4% of the VAT due |
3.2 Unexpected Tax Bills and Cash Flow Problems
One of the biggest mistakes new business owners make is not setting aside enough money for taxes.
Corporation tax is due 9 months after your financial year-end. If you haven’t saved enough, you could struggle to pay your bill.
VAT-registered companies must submit VAT returns every quarter. Many business owners forget to set aside the VAT they collect, leading to cash flow issues.
How to Avoid Unexpected Tax Bills:
Set aside 19-25% of your profits for corporation tax.
Keep 20% of sales revenue in a separate account to cover VAT.
Use accounting software like Xero, QuickBooks, or FreeAgent to track tax liabilities.
3.3 Business Banking Fees and Hidden Charges
While some banks offer free business accounts, many have hidden fees that add up over time.
Banking Fee Type | Estimated Cost |
Account maintenance fee | £5-£10 per month |
CHAPS payments | £20-£30 per transaction |
International payments | £10-£30 per transfer |
Overdraft fees | Varies (high interest rates) |
How to Avoid High Banking Fees:
Use a fee-free digital bank like Starling or Monzo Business.
Check for hidden charges before choosing a business account.
3.4 IT, Software, and Cybersecurity Costs
Many businesses overlook the cost of software subscriptions, cybersecurity, and IT support.
IT Expense | Estimated Cost (Annual) |
Website hosting | £50-£200 |
Domain name | £10-£30 |
Business email (Google Workspace, Microsoft 365) | £50-£100 per user |
Cybersecurity software | £100-£500 |
IT support | £500-£2,000 |
If you store customer data, you must comply with GDPR and ensure your business has proper cybersecurity to protect against hacking and fraud.
3.5 Legal and Intellectual Property Costs
If you need to trademark your brand name or logo, this comes with additional legal costs.
Legal Service | Cost |
Trademark registration (UK) | £170 (one class) + £50 per extra class |
Business contracts (drafted by a solicitor) | £200-£1,000 |
Copyright protection | Free (automatic) |
Registering a trademark protects your brand from being copied by competitors, while well-drafted contracts help prevent legal disputes.
3.6 Employee-Related Hidden Costs
If you hire staff, there are extra employment costs that many businesses forget to factor in.
Employee-Related Expense | Estimated Cost (Annual) |
Employer’s National Insurance | 13.8% of salary (if over £9,100 per year) |
Pension contributions | 3% minimum employer contribution |
HR software | £10-£50 per month |
Training and development | £100-£1,000 per employee |
If you have employees earning over £10,000 per year, you must auto-enrol them into a workplace pension scheme and contribute at least 3% of their salary.
3.7 Marketing and Advertising Costs
Many new businesses assume word-of-mouth will be enough, but marketing is essential for attracting customers.
Marketing Channel | Estimated Cost (Annual) |
Website development | £500-£5,000 |
Google Ads | £200-£5,000 |
Social media advertising | £100-£2,000 |
SEO (Search Engine Optimisation) | £500-£3,000 |
A basic marketing budget can start from £500 per year, but companies spending on SEO, advertising, and content creation often invest £2,000-£10,000 per year.
3.8 Total Estimated Hidden Costs for a Limited Company
Hidden Expense | Estimated Cost (Annual) |
Late filing penalties | £150-£1,500 |
Unexpected tax bills | Varies (avoid with planning) |
Business banking fees | £100-£500 |
IT and cybersecurity | £200-£2,000 |
Legal fees (contracts, trademarks) | £200-£1,000 |
Employee-related costs | £1,000-£5,000 |
Marketing & advertising | £500-£10,000 |
Total (Estimate for Small Business) | £2,000-£20,000+ |
How to Reduce Costs and Maximise Tax Efficiency for Your Limited Company
Running a limited company in the UK comes with a range of costs, but the good news is that many of these expenses can be reduced through smart financial planning and tax-efficient strategies. By taking advantage of allowable expenses, tax reliefs, and strategic financial decisions, you can legally lower your business costs and keep more of your earnings.
4.1 Paying Yourself Efficiently: Salary vs. Dividends
One of the biggest advantages of running a limited company is choosing how to pay yourself. The two main ways are:
Salary – Paid through the company’s payroll and subject to Income Tax and National Insurance.
Dividends – Paid from company profits after tax, subject to dividend tax, but free from National Insurance.
Best Tax-Efficient Salary and Dividend Mix (2024/25)
For many company directors, the most tax-efficient way to pay yourself is:
Take a small salary (up to £12,570 per year) – This is within the Personal Allowance, meaning no Income Tax is paid.
Take the rest as dividends – Dividends are taxed at lower rates than regular salary.
Income Type | Tax Rate (2024/25) |
Salary up to £12,570 | 0% (Personal Allowance) |
Salary over £12,570 | 20%-45% Income Tax + National Insurance |
Dividends up to £500 | 0% (Dividend Allowance) |
Dividends £500-£50,270 | 8.75% |
Dividends £50,270-£125,140 | 33.75% |
Dividends above £125,140 | 39.35% |
Example: Director’s Tax-Efficient Pay Structure
If your company earns £60,000 profit, here’s a smart way to pay yourself:
Income Source | Amount | Tax Due |
Salary | £12,570 | £0 |
Dividends | £30,000 | ~£2,500 (8.75%) |
Corporation Tax | £10,000 (on remaining profit) | £0 |
Total After-Tax Income | £42,570 | Minimal tax |
This setup ensures you pay minimal tax and avoid National Insurance contributions, keeping more of your earnings.
4.2 Claiming Allowable Business Expenses
One of the biggest benefits of running a limited company is claiming tax-deductible expenses, which reduce your taxable profits and lower your Corporation Tax bill.
Common Allowable Business Expenses
Expense | Tax Deductible? |
Office rent & utility bills | ✅ Yes |
Business travel (trains, flights, hotels) | ✅ Yes |
Phone & internet (business use only) | ✅ Yes |
Software subscriptions (e.g., accounting, design tools) | ✅ Yes |
Salaries & pensions for employees | ✅ Yes |
Professional fees (e.g., accountants, solicitors) | ✅ Yes |
Training & professional development | ✅ Yes |
Business insurance | ✅ Yes |
Client entertainment | ❌ No |
Personal expenses | ❌ No |
Example: How Expenses Reduce Corporation Tax
Let’s say your company earns £50,000 profit, but you have £10,000 in allowable expenses:
Taxable profit: £50,000 - £10,000 = £40,000
Corporation Tax (19%): £7,600 instead of £9,500
Total tax saved: £1,900
By claiming all legitimate business expenses, you can legally lower your Corporation Tax bill.
4.3 Using the VAT Flat Rate Scheme (for Small Businesses)
If your business is VAT-registered, you might benefit from the VAT Flat Rate Scheme (FRS).
How the VAT Flat Rate Scheme Works
Instead of claiming back VAT on every purchase, you pay a fixed percentage of your sales to HMRC.
This is often lower than standard VAT rates, meaning you keep more money.
Flat Rate VAT Example (for a Consultant)
Scenario | Standard VAT Scheme | Flat Rate Scheme (14.5%) |
VAT on £50,000 turnover | £10,000 (20%) | £7,250 (14.5%) |
VAT on business expenses | £2,000 reclaimed | None |
Total VAT paid to HMRC | £8,000 | £7,250 |
Total Savings | £750 saved |
The FRS is ideal for businesses with low expenses, such as consultants, freelancers, and service-based companies.
Check if your business qualifies on the HMRC VAT page.
4.4 Using a Director’s Loan Account to Withdraw Money Tax-Free
A Director’s Loan Account (DLA) lets you borrow money from your company without paying tax—if repaid within 9 months.
Example: Using a Director’s Loan Account
Your company makes £60,000 profit.
Instead of paying yourself dividends (which are taxed), you borrow £10,000 from the company.
If you repay it within 9 months, there is no tax liability.
If unpaid after 9 months, a temporary 33.75% tax charge applies (but is refunded when repaid).
This is a useful short-term cash flow solution, but should be used carefully.
4.5 Choosing the Right Business Structure
Not all limited companies need to remain Ltd companies forever. Some businesses may save money by switching to other structures.
Business Structure | Best For | Tax Benefits |
Ltd Company | Most small businesses | Lower Corporation Tax |
LLP (Limited Liability Partnership) | Partnerships | No employer NICs on partner drawings |
Sole Trader | Self-employed individuals | No Corporation Tax, simpler taxes |
If your company is not making much profit, remaining a sole trader or LLP might be cheaper and easier.
4.6 Negotiating Business Costs to Save Money
Many businesses overpay for services they could get cheaper by negotiating or switching providers.
Cost-Saving Tips:
✅ Switch to a free business bank account (Starling, Monzo Business).
✅ Use free accounting software (Wave, Pandle) instead of expensive ones.
✅ Negotiate with suppliers for better rates.
✅ Outsource work overseas for lower-cost services (Fiverr, Upwork).
By cutting unnecessary expenses, you can improve cash flow and profitability.
4.7 Total Estimated Savings for a Small Business
Tax-Saving Strategy | Estimated Annual Savings |
Salary & dividend optimisation | £3,000-£10,000 |
Claiming all business expenses | £1,000-£5,000 |
Using VAT Flat Rate Scheme | £500-£2,000 |
Negotiating supplier costs | £500-£3,000 |
Total Potential Savings | £5,000-£20,000+ |
By applying these strategies, a small business could save £5,000-£20,000 per year—money that can be reinvested into growth.
Is a Limited Company the Right Choice for Your Business?
Starting a limited company in the UK has many advantages, including tax efficiency, limited liability, and professional credibility. However, it also comes with administrative responsibilities, ongoing costs, and legal obligations that may not suit every business.
In this final section, we will explore whether forming a limited company is the right decision for your business, comparing it with other structures like sole trader or LLP (Limited Liability Partnership). We’ll also discuss key factors like tax savings, liability protection, and growth potential to help you decide.
5.1 Comparing Business Structures in the UK
The three most common business structures in the UK are:
Sole Trader – Simplest option, but personal liability for debts.
Limited Company (Ltd) – Separate legal entity, better tax benefits but more admin.
Limited Liability Partnership (LLP) – Suitable for partnerships, combines elements of both.
Comparison Table: Sole Trader vs Limited Company vs LLP
Feature | Sole Trader | Limited Company (Ltd) | LLP (Limited Liability Partnership) |
Liability Protection | No (personal liability) | Yes (company is separate from owner) | Yes (partners' liability is limited) |
Tax on Profits | Income Tax (up to 45%) | Corporation Tax (19-25%) | Partners pay Income Tax |
National Insurance | Higher NI contributions | Lower NI (via dividends) | Partners pay Class 2 & 4 NI |
Admin & Paperwork | Minimal | Higher (accounts, filings) | Moderate |
Legal Status | Not a separate entity | Separate legal entity | Separate legal entity |
Business Perception | Less professional | More credibility | More credibility |
For many small businesses, freelancers, or side hustlers, being a sole trader is simpler and cheaper. However, if you’re making £30,000+ in profit per year, a limited company can save you money on taxes.
5.2 Tax Efficiency: When Does a Limited Company Save You Money?
If your business earns more than £30,000 profit per year, forming a limited company is often more tax-efficient than being a sole trader.
Example: Tax Comparison (2024/25 Tax Year)
Annual Profit | Sole Trader (Income Tax & NI) | Limited Company (Corporation Tax + Dividends) | Savings with Ltd |
£20,000 | £2,486 | £2,438 | £48 |
£40,000 | £7,186 | £6,425 | £761 |
£60,000 | £14,186 | £10,438 | £3,748 |
£100,000 | £27,186 | £19,613 | £7,573 |
At £40,000+ profit, a limited company is noticeably more tax-efficient.
At £60,000+ profit, you could save over £3,000 per year.
If your income is below £30,000, staying a sole trader is often simpler and cheaper.
5.3 Limited Liability: Protecting Your Personal Assets
One of the biggest advantages of forming a limited company is limited liability.
What Does Limited Liability Mean?
If your business owes money or is sued, your personal assets (house, savings) are protected.
With a sole trader business, you are personally responsible for all debts.
Example: Why Limited Liability Matters
A sole trader runs a café and struggles with rent. They owe £10,000 to suppliers. If they can’t pay, they must pay from personal savings or risk bankruptcy.
A limited company running the same café would only lose company funds if it fails. The owner’s personal savings remain safe.
If your business involves big contracts, liability risks, or financial uncertainty, a limited company provides better protection.
5.4 Business Perception: Does a Limited Company Look More Professional?
Having “Ltd” in your business name makes you look more established and trustworthy.
When Does a Limited Company Look Better?
✅ If you’re working with corporate clients – Many larger companies prefer to work with Ltd companies for contracts.
✅ If you’re in consulting, IT, finance, or law – Clients see Ltd companies as more professional.
✅ If you plan to raise investment or sell shares – Investors prefer limited companies.
If you’re running a small side business, this won’t matter much. But for growth-focused businesses, a limited company improves credibility.
5.5 Exit Strategy: Can You Sell or Transfer Your Business Easily?
If you plan to sell your business in the future, a limited company is much easier to sell than a sole trader business.
Factor | Sole Trader | Limited Company |
Selling the Business | Harder (personal assets tied in) | Easier (can sell shares) |
Transferring Ownership | Difficult | Simple (sell shares, appoint new directors) |
If your long-term plan is to sell your business, it’s better to incorporate as a limited company from the start.
5.6 Key Signs That You Should Form a Limited Company
✅ You expect to make over £30,000 profit per year and want tax efficiency.
✅ You want to protect personal assets from business debts.
✅ You work with corporate clients or want a more professional image.
✅ You plan to grow or raise investment in the future.
✅ You want an easier exit strategy for selling or transferring ownership.
However, if you’re just starting out and don’t expect high profits, staying a sole trader might be the better choice due to fewer admin costs.
5.7 What’s the Process of Switching from Sole Trader to Limited Company?
If you’re already a sole trader, you can switch to a limited company at any time. The process is straightforward:
1️⃣ Register a new limited company at Companies House (£12 fee).
2️⃣ Tell HMRC that you are stopping self-employment and moving to a company.
3️⃣ Set up a business bank account for the new company.
4️⃣ Transfer assets and contracts from your sole trader business to the company.
5️⃣ Start invoicing clients under the new company name.
This does not reset your tax obligations – if you switch mid-year, you’ll file taxes for both the sole trader period and the limited company period separately.
5.8 Final Decision: Should You Form a Limited Company?
Business Type | Best Structure |
Freelancer earning under £30,000 | Sole Trader |
Small business with £30,000-£50,000 profit | Consider Ltd |
Consulting or contracting business | Ltd (for credibility) |
Business with liability risks | Ltd (for asset protection) |
Startup looking for investment | Ltd (for shares & funding) |
Business planning to be sold later | Ltd (for an easy sale) |
For low-income freelancers, side hustlers, or early-stage businesses, staying a sole trader is cheaper and easier. But if you want tax efficiency, liability protection, and credibility, a limited company is a smarter choice.
Summary of Key Points
1️⃣ Registering a limited company in the UK costs as little as £12 online, but additional expenses like a registered office, accountant, and insurance can increase costs to £100-£500+.
2️⃣ Ongoing costs include annual filings (£13-£40), Corporation Tax (19-25% on profits), payroll taxes, VAT (if turnover exceeds £90,000), and business insurance (£100-£500 per year).
3️⃣ Late filing penalties for accounts and taxes can reach £1,500+, and VAT or Corporation Tax delays may incur interest and additional fines.
4️⃣ Hidden costs include banking fees, software subscriptions, legal expenses, cyber security, employee benefits, and marketing (£2,000-£20,000 per year depending on business size).
5️⃣ A tax-efficient way to pay yourself is through a small salary (£12,570) and dividends, reducing National Insurance and keeping more post-tax income.
6️⃣ Claiming allowable business expenses (e.g., travel, office costs, software) can significantly lower taxable profits and reduce Corporation Tax liabilities.
7️⃣ VAT-registered businesses can save money using the VAT Flat Rate Scheme, which simplifies VAT payments and allows businesses to keep more of their revenue.
8️⃣ A limited company provides liability protection, safeguarding personal assets from business debts, unlike sole traders who are personally responsible.
9️⃣ Businesses earning over £30,000 in profit per year typically benefit from limited company tax efficiencies, saving thousands in taxes compared to sole traders.
🔟 If your business involves corporate clients, liability risks, or future growth plans, a limited company offers better credibility, asset protection, and long-term flexibility.
FAQs
Q1: Can you register a limited company in the UK without a business address?
A: No, you must provide a registered office address in the UK for official correspondence, but you can use a virtual office service if you don’t want to use your home address.
Q2: How long does it take to register a limited company in the UK?
A: Online registration through Companies House usually takes 24 hours, while postal applications take 8-10 days unless you pay extra for same-day service.
Q3: Can you register a limited company in the UK for free?
A: No, the minimum cost to register a company is £12 online via Companies House, but some company formation agents offer free incorporation if you purchase additional services.
Q4: Do you need a business bank account to start a limited company?
A: While it is not legally required, it is highly recommended as a limited company is a separate legal entity, and using a personal account can cause tax and compliance issues.
Q5: Can you change your company name after registering a limited company?
A: Yes, you can change your company name after registration by submitting a NM01 form to Companies House, which costs £8 online or £10 by post.
Q6: What happens if you don’t pay the Companies House annual fee?
A: If you fail to file your confirmation statement (£13 online or £40 by post), your company may be struck off the register, and directors can face penalties.
Q7: Can you transfer a sole trader business to a limited company?
A: Yes, you can transition from a sole trader to a limited company by registering the new entity, transferring assets, and notifying HMRC of the change.
Q8: Do you need an accountant to start a limited company?
A: No, you can handle accounting yourself using software, but many businesses hire an accountant to manage Corporation Tax, VAT, and payroll efficiently.
Q9: Can a foreign national start a limited company in the UK?
A: Yes, non-UK residents can start a UK limited company, but they must have a UK registered office address and may need a UK business bank account.
Q10: Is there a monthly cost to maintain a limited company?
A: While there is no fixed monthly fee, businesses typically incur costs for accounting, insurance, payroll, and software, which can range from £50-£500 per month.
Q11: Can you start a limited company without trading immediately?
A: Yes, you can register a dormant company, which has no financial transactions, but you must still file annual accounts and a confirmation statement.
Q12: How much does it cost to dissolve a limited company in the UK?
A: Closing a company via voluntary strike-off costs £10, but liquidation due to debts can cost thousands depending on the complexity of the process.
Q13: Do you need to be VAT-registered when starting a limited company?
A: No, VAT registration is only mandatory if your annual taxable turnover exceeds £90,000; otherwise, it’s optional.
Q14: Can a limited company operate from home?
A: Yes, many small businesses operate from home, but you must register a separate business address unless using your home address for official purposes.
Q15: Can you set up a limited company if you’re employed elsewhere?
A: Yes, you can own and run a limited company while being employed, but you should check your employment contract for restrictions.
Q16: Can you own multiple limited companies in the UK?
A: Yes, there is no legal limit to how many limited companies you can own, but each company must be registered separately with Companies House.
Q17: Do you have to pay business rates if you start a limited company?
A: Business rates apply if you operate from commercial premises, but home-based businesses are usually exempt unless using a dedicated workspace.
Q18: What is the difference between a private and public limited company?
A: A private limited company (Ltd) cannot publicly trade shares, while a public limited company (PLC) can sell shares to the public but has stricter financial requirements.
Q19: Can a limited company have only one director and no employees?
A: Yes, a limited company can have just one director, who can also be the sole shareholder and operate the company without employees.
Q20: How do you check if a company name is available in the UK?
A: You can use the Companies House name availability checker to see if your desired company name is already taken.
Summary of Key Points
1️⃣ Registering a limited company in the UK costs as little as £12 online, but additional expenses like a registered office, accountant, and insurance can increase costs to £100-£500+.
2️⃣ Ongoing costs include annual filings (£13-£40), Corporation Tax (19-25% on profits), payroll taxes, VAT (if turnover exceeds £90,000), and business insurance (£100-£500 per year).
3️⃣ Late filing penalties for accounts and taxes can reach £1,500+, and VAT or Corporation Tax delays may incur interest and additional fines.
4️⃣ Hidden costs include banking fees, software subscriptions, legal expenses, cyber security, employee benefits, and marketing (£2,000-£20,000 per year depending on business size).
5️⃣ A tax-efficient way to pay yourself is through a small salary (£12,570) and dividends, reducing National Insurance and keeping more post-tax income.
6️⃣ Claiming allowable business expenses (e.g., travel, office costs, software) can significantly lower taxable profits and reduce Corporation Tax liabilities.
7️⃣ VAT-registered businesses can save money using the VAT Flat Rate Scheme, which simplifies VAT payments and allows businesses to keep more of their revenue.
8️⃣ A limited company provides liability protection, safeguarding personal assets from business debts, unlike sole traders who are personally responsible.
9️⃣ Businesses earning over £30,000 in profit per year typically benefit from limited company tax efficiencies, saving thousands in taxes compared to sole traders.
🔟 If your business involves corporate clients, liability risks, or future growth plans, a limited company offers better credibility, asset protection, and long-term flexibility.
FAQs
Q1: Can you register a limited company in the UK without a business address?
A: No, you must provide a registered office address in the UK for official correspondence, but you can use a virtual office service if you don’t want to use your home address.
Q2: How long does it take to register a limited company in the UK?
A: Online registration through Companies House usually takes 24 hours, while postal applications take 8-10 days unless you pay extra for same-day service.
Q3: Can you register a limited company in the UK for free?
A: No, the minimum cost to register a company is £12 online via Companies House, but some company formation agents offer free incorporation if you purchase additional services.
Q4: Do you need a business bank account to start a limited company?
A: While it is not legally required, it is highly recommended as a limited company is a separate legal entity, and using a personal account can cause tax and compliance issues.
Q5: Can you change your company name after registering a limited company?
A: Yes, you can change your company name after registration by submitting an NM01 form to Companies House, which costs £8 online or £10 by post.
Q6: What happens if you don’t pay the Companies House annual fee?
A: If you fail to file your confirmation statement (£13 online or £40 by post), your company may be struck off the register, and directors can face penalties.
Q7: Can you transfer a sole trader business to a limited company?
A: Yes, you can transition from a sole trader to a limited company by registering the new entity, transferring assets, and notifying HMRC of the change.
Q8: Do you need an accountant to start a limited company?
A: No, you can handle accounting yourself using software, but many businesses hire an accountant to manage Corporation Tax, VAT, and payroll efficiently.
Q9: Can a foreign national start a limited company in the UK?
A: Yes, non-UK residents can start a UK limited company, but they must have a UK registered office address and may need a UK business bank account.
Q10: Is there a monthly cost to maintain a limited company?
A: While there is no fixed monthly fee, businesses typically incur costs for accounting, insurance, payroll, and software, which can range from £50-£500 per month.
Q11: Can you start a limited company without trading immediately?A: Yes, you can register a dormant company, which has no financial transactions, but you must still file annual accounts and a confirmation statement.
Q12: How much does it cost to dissolve a limited company in the UK?
A: Closing a company via voluntary strike-off costs £10, but liquidation due to debts can cost thousands depending on the complexity of the process.
Q13: Do you need to be VAT-registered when starting a limited company?
A: No, VAT registration is only mandatory if your annual taxable turnover exceeds £90,000; otherwise, it’s optional.
Q14: Can a limited company operate from home?
A: Yes, many small businesses operate from home, but you must register a separate business address unless using your home address for official purposes.
Q15: Can you set up a limited company if you’re employed elsewhere?
A: Yes, you can own and run a limited company while being employed, but you should check your employment contract for restrictions.
Q16: Can you own multiple limited companies in the UK?
A: Yes, there is no legal limit to how many limited companies you can own, but each company must be registered separately with Companies House.
Q17: Do you have to pay business rates if you start a limited company?
A: Business rates apply if you operate from commercial premises, but home-based businesses are usually exempt unless using a dedicated workspace.
Q18: What is the difference between a private and public limited company?
A: A private limited company (Ltd) cannot publicly trade shares, while a public limited company (PLC) can sell shares to the public but has stricter financial requirements.
Q19: Can a limited company have only one director and no employees?
A: Yes, a limited company can have just one director, who can also be the sole shareholder and operate the company without employees.
Q20: How do you check if a company name is available in the UK?
A: You can use the Companies House name availability checker to see if your desired company name is already taken.
Disclaimer:
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We encourage all readers to consult with a qualified professional before making any decisions based on the information provided. The tax and accounting rules in the UK are subject to change and can vary depending on individual circumstances. Therefore, Pro Tax Accountant cannot be held liable for any errors, omissions, or inaccuracies published. The firm is not responsible for any losses, injuries, or damages arising from the display or use of this information.