Company Formation for Contractors
— Clear Formation Guidance

You are not legally required to use a limited company, but it is the most tax-efficient arrangement for contractors earning above approximately £35,000 per year. Many clients and recruitment agencies also require limited company status as a condition of engagement.

A PSC is simply a limited company that you own and operate, through which you provide your services to clients. HMRC uses this term specifically in the context of IR35 legislation. It is a standard private limited company registered at Companies House.

IR35 (the off-payroll working rules) determines whether your engagement should be treated as employment for tax purposes. If you operate outside IR35, you pay yourself via salary and dividends at lower effective tax rates. If inside IR35, you pay employment taxes on that income. Operating through a limited company gives you the ability to assess your IR35 status on each contract rather than defaulting to employed status as umbrella workers must.

On a typical day rate of £400–£600, a limited company contractor often takes home £8,000–£15,000 more per year compared to an umbrella arrangement, depending on your specific circumstances, expenses, and IR35 status. We always recommend speaking with a contractor accountant to model your specific situation.

Companies House processing times vary. You can begin invoicing through the company once it is incorporated and you have the appropriate banking and contractual arrangements in place; a Tide account application is separate and subject to approval.

Yes. The majority of contractor limited companies are structured with a single director who is also the sole or majority shareholder. You can also issue shares to a spouse or civil partner for additional tax planning flexibility.