Tax Advice

How to Incorporate a Company in the U.K.

You run a business that you’re proud of. But there comes a day when you wonder if you should try and make things a little more official. And soon enough, your thoughts turn to incorporating your business.

But is this the right move for you? We’re going to walk you through the pros and cons of setting up, or switching to, a private limited company, the things you should consider, and how to incorporate your business in the U.K.

Why Should I Incorporate My U.K. Business?

There are a number of reasons why you should consider turning your business into a private limited company.

Professional Image

Being the owner of a private company can help persuade your customers to trust you. Plus, some businesses may only work with limited companies and not sole traders.

Business Financing

As a limited company, it becomes easier to apply for and fund your business with loans and credit. There are more options available for securing business finance, and lenders may be willing to offer you more favourable interest rates and repayment terms.

Protected Business Name

When you register your business with Companies House, your company name will appear on the official register of companies. This means your company name is protected under U.K. law and nobody else can claim it as theirs. They can’t trade under it or a name that sounds identical to it and within the same sector as you.

Nobody can undermine your business by pretending to be you or deliberately attempting to confuse your customers by using your company name or something similar to it.

Pension Contributions

You can fund your executive pensions and claim these as a business expense. This opens up a big tax advantage that you wouldn’t have access to as a sole trader.

What Is a Limited Company?

A private limited company is a kind of business structure that has its own legal identity and is a company limited by shares, separate from its shareholders and directors. The company must file annual accounts and a confirmation statement each year with Companies House, and file a U.K. company tax return, and pay corporation tax to HMRC.

Is It Better to Be a Sole Trader or a Limited Company?

When you operate as a sole trader, you’re personally responsible for your company’s debts. Your personal assets will be at risk during financial difficulty, as you and the business are the same legal entity.

But this isn’t the case when you own a private limited company. It’s treated as a separate legal entity to you, meaning that in the event of financial trouble, your personal assets aren’t at risk. This is called limited liability.

Limited companies can also be more tax-efficient. Sole traders must pay income tax on any profits over the tax-free threshold of £12,570. And the more you earn, the higher the rate of tax you pay.

But as a limited company owner, you can pay less tax by paying yourself a modest salary and topping this up with dividend payments. Dividends are tax-free for the first £1,000, and subject to lower rates of tax after this:

• A basic rate of 8.75%
• A higher rate of 33.75%
• An additional rate of 39.35%

That said, limited companies must pay corporation tax at the rate of 19%, for profits under £50,000 and 25% for profits over  £250,000. Companies with profits between £50,000 and £250,000 will pay tax at the main rate, reduced by Marginal Relief. This involves submitting a company tax return to HMRC each year. You also need to file your annual accounts with Companies House.

There’s no doubt it’s easier and cheaper to get set up as a sole trader than it is to register as a limited company. So it may be a better option for you if you have few personal assets that would be at risk and if you think you’ll be earning at the lower rate of income tax for a few years to come.

How Much Does It Cost to Run a Limited Company in the U.K.?

It costs £12 to register a limited company online, and you can pay by debit or credit card. Your company is usually registered within 24 hours. You can also register by post by sending an IN01 form to Companies House, which costs £40.

And if you want same-day registration for a paper application, this will cost £100. However, same-day Companies House services have been suspended during COVID-19.

Then there are your running costs to consider. These may include:

• Accountancy fees
• Business insurance
• Bookkeeping software
• Expenses and taxes
• Annual confirmation statement (£13)

Do I Need an Accountant to Set Up a Limited Company?

There’s no legal requirement to work with an accountant to set up your limited company. But you may find they can offer a great deal of help when it comes to tax registration, annual accounts, and filing tax returns.

How Do I Incorporate My Business in the U.K.?

So, how do you register a limited company in the U.K.? Here are the steps you need to take.

Register a Company Name

Before you decide on a name for your business, make sure it’s available to use in the U.K.

When choosing a name for your limited company:

• Research the industry you’re working in: Competitors’ names may help you find the inspiration you need
• Pick a name that means something: Your business’ name is the first thing a prospective customer will learn about you, so make sure this explains what you do
• Keep your company’s name short: This is easier to remember than a long one
• Avoid a name that’s hard to spell: You want something that people can pronounce easily

Enter Your Company Information

When you register your limited company, Companies House will want to know about your:

• Registered office address: This is where HMRC and Companies House will send your post, so it must be in the U.K., and they must be able to reach the company directors here
• Company directors: You need at least one director, and Companies House will want to know their name, date of birth, and residential address
• Shareholders: You need at least one shareholder, and Companies House will want the same information about them as the company directors

Your company director and shareholder can be the same person, and this can be you. The information you provide will be made public. If your registered office address is your home address, but you don’t want this to be publicly available, consider using a co-work space or serviced office as your registered office address.

Allocate Company Shares

You need to allocate shares to your shareholders when setting up a limited company. The easiest approach to this is to allocate 1 share to each shareholder at the value of £1 each.

Complete the Memorandum and Articles of Association

These company documents set out how your company will be run. They need to be signed by your shareholders, directors, and company secretary before you register your limited company.

Submit Everything to Companies House

Submit everything by 3pm if you want same-day registration.

How Long Does It Take to Register a Company?

Online registration with Companies House usually takes 24 hours, and postal applications can take 8–10 days.

Is Incorporation Right for You?

Setting up, or transferring to, a limited company structure is a big step for any business owner. While it offers plenty of advantages, including tax efficiency and limited liability, your individual circumstances will determine if this is the right move for you.

If you’re unsure of anything, an accountant or tax professional may be able to help you decide which business structure is right for you.

This post was updated in January 2024.