Guide · Business

Setting Up a UK Limited Company in 2026: Costs, Tax and a Step-by-Step Guide.

A straight, plain-English breakdown of what incorporating a UK company involves in 2026 — Companies House fees, the new identity verification requirement, corporation tax, the salary and dividend split that has just shifted, and when going limited actually makes sense versus staying as a sole trader. Information, not advice.

The headline figures.

Before getting into the mechanics, three numbers worth anchoring on. They've all changed in the last 18 months, and the changes matter.

The dividend tax rise in particular has shifted the maths of the limited company structure. The total tax-efficient extraction is still genuinely lower than the sole trader equivalent at most profit levels, but the gap has narrowed. The case for going limited is now driven as much by liability protection, credibility, and avoiding MTD ITSA quarterly reporting as by pure tax savings.

Limited vs sole trader — when to switch.

Most people start as sole traders. Some never need to switch. The question of when to incorporate is a balance of tax savings, admin burden, liability, and a handful of practical considerations that aren't about money at all.

The tax crossover

At low profit levels (below ~£30,000) the tax advantage of a limited company is small and often outweighed by extra accountancy fees. From around £40,000 to £50,000 in annual profit, the corporation tax + dividend extraction structure starts saving meaningfully versus paying full personal income tax and Class 4 NI as a sole trader. Above £60,000 in profit the gap is usually clear. At £100,000+, it can be £8,000 to £15,000+ per year.

Non-tax reasons that often matter more

• Liability protection. A limited company is a separate legal entity. Its debts are not (in general) your personal debts. As a sole trader, your personal assets are exposed.
• Credibility with larger clients. Some clients require working with limited companies for compliance or procurement reasons. This matters in B2B services, technology, construction, and government work.
• Avoiding MTD ITSA quarterly reporting. Limited companies are not within the scope of Making Tax Digital for Income Tax. With sole-trader MTD now live from April 2026 at the £50,000 threshold (dropping to £30,000 in 2027 and £20,000 in 2028), this has become a real factor for many.
• Pension efficiency. Employer pension contributions paid by the company are deductible against corporation tax with no employer NI — generally more tax-efficient than personal pension contributions.
• Capital structure. Shares can be issued, transferred, split. Easier to bring in investors or partners, easier to sell at exit, easier to incentivise future hires with shares.
• Profit retention. Money left inside the company is taxed at 19% to 25% corporation tax. Outside the company, the same money would be in the highest personal tax bracket. Retaining profits for future use or investment is far more tax-efficient inside a limited company.

For a detailed walk-through of the sole trader side of this comparison, see the Going Self-Employed UK 2026 guide.

How to incorporate at Companies House.

Setting up a UK limited company is a formal legal act registered at Companies House. The mechanics are straightforward once you know the sequence.

Step 1: Choose a company name

Check availability at Companies House's free name-check tool on gov.uk. The name must end in "Limited" or "Ltd" (or the Welsh equivalents). Some words are restricted — "Bank", "Royal", "Trust" and others need approval. Avoid names too close to existing companies. Trademark conflicts are checked separately — use the IPO database before committing.

Step 2: Decide on directors, shareholders and PSCs

Every UK company needs at least one director (over 16, not disqualified, not bankrupt) and at least one shareholder. The director and shareholder can be the same person. Persons with Significant Control (PSCs) — typically anyone holding more than 25% of shares or voting rights — must be identified and registered separately.

Step 3: Sort the registered office address

Since March 2024, every UK company must have a physical UK registered office address — a PO Box alone is no longer acceptable. The address is on the public register. Many directors use a paid registered office service (£20-£60/year) to keep their home address off the public record. A registered email address is also required at incorporation.

Step 4: Prepare the Memorandum and Articles of Association

The Memorandum is a one-page declaration of intent. The Articles of Association are the company's internal rulebook — covering how shares are issued, how directors are appointed, what decisions need shareholder approval, and so on. Model articles (the default off-the-shelf version) are appropriate for most small companies and free to use.

Step 5: File with Companies House

Most incorporations are done online through the Companies House WebFiling service or via a formation agent. Current fees from 1 February 2026:

Once accepted, Companies House issues a Certificate of Incorporation. You're a limited company. HMRC is automatically notified.

Step 6: Post-incorporation tasks

• Register for Corporation Tax with HMRC (within 3 months of starting to trade)
• Open a dedicated business bank account in the company name
• Register for VAT if turnover will exceed £90,000 in 12 months (or voluntarily)
• Set up PAYE if employing anyone (including paying yourself a director salary)
• Buy any required insurance (professional indemnity, public liability, employers' liability if applicable)

Identity verification — the new requirement.

This is the biggest procedural change to UK incorporation in decades, and a lot of people are still unaware of it.

From 18 November 2025, identity verification became compulsory for all new directors, PSCs and certain filers under the Economic Crime and Corporate Transparency Act 2023. Existing directors and PSCs have until 18 November 2026 to complete verification.

How to verify

Two routes:

• GOV.UK One Login — the government's digital identity service. Free, takes about 10-20 minutes, uses passport or driving licence plus a facial recognition check via the app.
• Authorised Corporate Service Provider (ACSP) — typically your accountant, solicitor, or company formation agent. They verify your identity once, then can act as a verified filer for you. Usually charged at £30 to £80 as a one-off.

Without verification, you cannot be appointed as a director and the company cannot file its confirmation statement. Companies that miss the November 2026 deadline for existing officeholders will be in breach of statutory duties. This is not a soft launch — the new powers under ECCTA give Companies House the ability to reject filings, query information, and remove directors from the register.

Corporation tax in 2026/27.

Companies pay tax on their profit at one of two main rates — with a marginal relief calculation in between.

Inside the marginal relief band, the effective rate climbs smoothly from 19% to 25%, peaking at 26.5% on the slice of profit between £50,000 and £250,000 (the marginal rate is higher than 25% to make the average work out). This makes the £50,000 threshold an unusually important planning line — keeping profits just under it saves disproportionately.

Associated companies: If you control more than one company (or several companies are controlled by the same people), the £50,000 and £250,000 thresholds are divided by the number of associated companies. Two companies under common control means each company has its own thresholds of £25,000 and £125,000.

When and how corporation tax is paid

Corporation tax is paid 9 months and 1 day after the company year-end. So a company with a 31 March year-end pays its corporation tax by the following 1 January. The CT600 corporation tax return is filed with HMRC within 12 months of the year-end. Annual statutory accounts must be filed at Companies House within 9 months of the year-end (the deadlines diverge slightly — corporation tax is paid before the accounts are formally filed).

Paying yourself — the salary and dividend split.

This is the part of running a limited company that gets most attention. Directors generally take a mix of salary (subject to PAYE income tax and National Insurance, but deductible against corporation tax) and dividends (paid from post-corporation-tax profits, taxed at lower dividend rates with no NI). The skill is balancing the two each year.

2026/27 dividend tax rates

Dividend rates increased by 2 percentage points from 6 April 2026, the first major dividend tax rise since 2022:

The three common salary levels for directors

Most sole-director companies pick one of three salary strategies:

• £5,000 — below the secondary NI threshold. No employer NI cost. Smaller corporation tax saving. Useful for very small companies or where the director already has employment income elsewhere using the Personal Allowance.
• £6,708 — at the Lower Earnings Limit. Earns a qualifying year towards the State Pension without actually paying NI. Slightly above the secondary threshold so a small amount of employer NI is due. Popular middle-ground option.
• £12,570 — at the full Personal Allowance. The corporation tax relief on the full £12,570 salary usually outweighs the employer NI cost (15% on the slice above £5,000). For companies paying the 25% main corporation tax rate, this is almost always the optimal choice. For companies on the 19% small profits rate without Employment Allowance, the saving is smaller but still positive.

Worked example — £80,000 company profit, sole director

A common case: a freelancer or contractor company generating £80,000 in profit before salary, with the sole director extracting income to live on.

Compare to a sole trader generating the same £80,000 profit: total income tax + Class 4 NI of approximately £22,186, leaving £57,814 take-home. So at £80,000 profit, the gap has narrowed substantially since the dividend tax rises. The case for a limited company is no longer primarily about saving income tax — it's about liability, credibility, profit retention, and MTD avoidance.

Other ways to extract value

• Employer pension contributions. The company pays directly into your pension. Deductible against corporation tax. No employer NI on the contribution. Subject to the £60,000 annual allowance.
• Business expense reimbursements. Not income at all — the company simply reimburses you for genuine business costs you paid personally.
• Director's loan. Borrow money from the company. Repayable. Specific rules apply (S455 tax charge if not repaid within 9 months of year-end) and HMRC scrutinises director loans carefully.
• Spouse as second shareholder. If your spouse genuinely works in the business or is a legitimate shareholder, they can receive dividends too — using their own Personal Allowance and dividend basic-rate band.

Ongoing filings and deadlines.

Running a limited company creates a recurring set of statutory filings. None of them are hard individually; the cost of forgetting them is what catches people out.

Annual filings

• Confirmation statement — filed annually at Companies House. Confirms the company's basic details (directors, PSCs, registered office, share capital). £50 digital filing fee from 1 February 2026. Late filing is a criminal offence — the company can be struck off.
• Annual accounts — filed at Companies House within 9 months of the year-end. Free to file (the fee is in the preparation, which is what accountants charge for). Small companies file abridged accounts; micro-entities file simpler still.
• Corporation tax return (CT600) — filed with HMRC within 12 months of year-end. Tax is paid 9 months and 1 day after year-end (so before the return is filed).

Periodic filings

• PAYE — Real Time Information (RTI) submissions every time payroll runs. Monthly or weekly depending on payroll frequency.
• VAT returns — quarterly if registered, submitted digitally under MTD for VAT. Monthly or annual schemes also available.
• P11D — annual benefits-in-kind report by 6 July if any director or employee receives non-cash benefits (company car, private medical insurance, etc.).

Director's self assessment

Most directors of small limited companies are also required to file personal Self Assessment returns to declare dividend income, salary above basic levels, and any other income. The deadline is 31 January following the tax year, in line with the standard sole trader timeline.

IR35 for contractors.

If your limited company will be providing services to a single client (or a small number of clients) on an extended basis — the classic IT contractor, consultant, or interim manager model — IR35 is essential to understand before incorporating.

IR35 (formally the "off-payroll working rules") is the test of whether a contractor working through a Personal Service Company (PSC) is genuinely running a business or is, in substance, an employee of the client. Inside-IR35 contracts are taxed broadly like employment income, removing most of the tax advantage of the limited company structure.

The status tests

HMRC looks at the actual working arrangement, not just the contract wording. The main factors:

• Substitution — can you send someone else to do the work? A genuine right of substitution points strongly to outside-IR35.
• Control — does the client direct what, when, where and how you work? More control points towards inside-IR35.
• Mutuality of obligation — is the client obliged to offer you work, and are you obliged to accept? Permanent ongoing obligation points to inside-IR35.
• Integration — are you part of the client's team (own email, attend their meetings, performance review them)? Points inside.
• Equipment, financial risk, multiple clients — all point outside-IR35.

Who decides

Since April 2021, medium and large clients are responsible for determining IR35 status of contractors they engage. Small clients (companies with under £10.2m turnover, under £5.1m balance sheet, fewer than 50 employees) leave the responsibility with the contractor's own company. The status determination must be communicated to the contractor in writing.

For contractors, IR35 is the single biggest reason to be cautious about the limited company route. Outside-IR35 contracts make a limited company worthwhile; inside-IR35 contracts often make an umbrella company or PAYE arrangement simpler.

The most common mistakes.

Patterns repeat across new directors. The expensive mistakes are nearly always avoidable:

• Incorporating too early. Below £30,000 profit the admin and accountant cost usually exceeds the tax saving. Stay as a sole trader and revisit the question annually.
• Not opening a separate business bank account. Mixing personal and company money breaches the separate-legal-entity principle and can pierce the limited liability "veil" if creditors pursue you.
• Taking informal "drawings". Sole traders can take whatever they want from the business as drawings. Directors cannot. Money taken without payroll, dividends or director's loan paperwork creates problems with HMRC.
• Paying dividends without distributable profits. Dividends can only be paid from accumulated post-tax profits. Paying when there are no distributable profits creates an illegal dividend that HMRC and the courts can require to be repaid.
• Forgetting the confirmation statement. Late filing is a criminal offence. The company can be struck off, with directors becoming personally liable for any debts.
• Missing the identity verification deadline. All existing officeholders must verify by 18 November 2026. After that, the company cannot file its confirmation statement.
• Ignoring IR35. Working through a PSC on a single long-term contract that looks like employment is the most common reason for HMRC enquiries into contractor companies. Get a proper status review before signing the contract.
• Not planning for the dividend tax rise. The April 2026 increase has added meaningfully to the tax bill of any director extracting more than £20,000 in dividends. Review pension contributions, profit retention, and spouse shareholding as alternatives.

Frequently asked questions.