When I first decided to go solo and start contracting, I had no idea what was really involved in setting up a limited company. I knew it was supposed to be more tax-efficient, and everyone I spoke to said it was the “professional” way to go. But beyond that? I was flying blind. Now, several years into running my own business (ContractorPal.co.uk), I’ve learned firsthand what the real costs are, both upfront and ongoing. And believe me, the £12 fee you see on Companies House? That’s just the tip of the iceberg.
This guide is my no-holds-barred, real-world walkthrough of how much it costs to set up and run a limited company in the UK, from the moment you think “maybe I should register a company” to when you’re managing your books, dealing with tax, and keeping your business running day-to-day. Whether you’re a brand-new contractor or a sole trader thinking about switching to limited, this post is for you.
The Initial Setup Cost: What You’ll Pay on Day One
Starting with the basics, the Companies House fee to register a limited company online is just £12. Sounds simple, right? If you go through their web incorporation service, it’s cheap and fast, usually processed within 24 hours. But not everyone feels confident doing it solo, especially if you’re worried about getting your SIC code, share allocation, or director details wrong.
That’s why many people choose a formation agent, which can cost anywhere from £15 to £150, depending on the package. Some agents throw in a few perks, like a printed certificate of incorporation, a business address for a year, or even help setting up a bank account, but always check the fine print. Some of these “extras” come with sneaky renewal charges in year two.
The first time I set up a company, I used a budget formation agent for about £40. It came with some helpful guidance and a registered office address for 12 months. I thought it was a bargain, until I realised they automatically billed me £60 a year later to keep using the address service.
So yes, you can technically register for £12, but most contractors end up paying somewhere between £30 and £100 once you factor in extras and avoidable pitfalls.
Do You Need a Business Bank Account Right Away?
Yes, you do. Even though it’s not legally required, separating your business and personal finances is crucial when running a limited company. Not just for tax reasons, it makes your life so much easier when you’re reconciling payments, submitting accounts, or even just checking cash flow.
The good news is that several online banks now offer free business bank accounts, or at least ones with low monthly fees. Tide, Starling, and Monzo are popular among freelancers and small businesses. If you go with a traditional high street bank, you might get charged around £6–£12 per month, depending on the features.
For my company, I started with Tide, which was free at the time. It worked great initially, but as the business grew, I switched to Starling because I liked their reporting features better, and they didn’t charge monthly fees. So, while your first-year banking costs can be £0, don’t forget that if you outgrow your provider, you might end up paying a little more later on.
Hiring an Accountant: Worth It or Waste of Money?
I cannot stress this enough, get an accountant.
Yes, you can try doing everything yourself, especially if you’re good with numbers or using accounting software. But the UK tax system for limited companies is complex, especially with Corporation Tax, VAT, dividend rules, and IR35. Having a professional handle your accounts will save you time, money, and stress.
Expect to pay somewhere between £600 and £1,200 per year for a good small business accountant. This usually includes your annual accounts, Corporation Tax return, confirmation statement, and advice throughout the year. Some will even process your payroll and help with VAT.
Online accountants like FreeAgent or Crunch offer packages starting around £75 per month. I used an online firm for a while, and they were great, until I had an IR35 query and needed someone who actually understood contracting. That’s when I moved to a specialist contractor accountant, and I’ve been with them ever since.
They charge me £95 a month plus VAT, which I think is totally fair for the peace of mind and tax savings I get.
Ongoing Costs You Need to Budget For
Let’s say you’ve registered your company, opened a bank account, and hired an accountant. That’s not the end of the story. Every year, you’ll face several recurring costs.
First is the confirmation statement, which costs £13 if you file it yourself. It’s a basic annual update for Companies House, confirming that your company details are still accurate.
Then there’s your Corporation Tax return, which is typically filed by your accountant. This comes included in most accountancy packages, but if you’re DIY-ing it, you’ll need good software and nerves of steel.
If you’re running payroll (even just for yourself as director), there are PAYE and payroll costs, you might pay extra for payroll services if it’s not bundled into your accountancy package. Same for VAT, if you need to register (threshold is currently £90,000 turnover per year), you may need to file quarterly returns.
All in all, your annual running costs can easily range from £1,000 to £2,000 even if you’re keeping things lean.
Insurance: What You Can’t Legally Skip
One of the most surprising expenses when I started my limited company was insurance. I didn’t realise just how critical it was—not only from a legal standpoint but also to protect myself from costly mistakes.
The first policy most contractors will need is Public Liability Insurance. This protects you if a third party is injured or their property is damaged due to your work. While it’s not legally required, many clients won’t even consider working with you unless you have it. For me, it cost around £120 a year for basic coverage, which I got through a contractor-specific insurer.
Next up is Professional Indemnity Insurance. This one is absolutely essential if you offer advice or services where mistakes could cost your client money. For IT contractors, consultants, designers, pretty much anyone offering knowledge-based work, it’s a must. Depending on your sector and risk, this can cost anywhere from £150 to over £500 a year. I paid about £260 initially, which gave me peace of mind knowing that if I messed something up, I wouldn’t go bankrupt trying to fix it.
If you’re the only person in your company, you might think you can skip Employers’ Liability Insurance, but you’d be wrong. The law requires it even if you’re the sole employee, as technically, your company is employing you. That was a real “wait, what?” moment for me. Thankfully, most insurers bundle this with other policies, and it added about £60 extra per year to my premium.
And then there’s Tax Investigation Insurance. It’s optional, but if you’ve ever seen the chaos a random HMRC audit can bring, you’ll want this. It covers the cost of an accountant or legal advisor defending you during an investigation. I added it to my policy for around £100 a year.
What About IR35? How Does It Impact Costs?
Ah, IR35. The elephant in the room for contractors. If you’re planning to take on contracts through your limited company, understanding IR35 is absolutely essential. The wrong setup can land you with a huge unexpected tax bill, especially if HMRC decides you’re a disguised employee.
IR35 applies to contractors who work like employees in practice, even if they’re paid as a business. If you’re inside IR35, you have to pay income tax and National Insurance similar to a full-time employee. If you’re outside, you get the benefits of working through a limited company—namely, tax efficiencies.
The cost of managing IR35 comes in a few forms. First, there’s the price of having your contracts reviewed. You can get a basic review for around £75, or a detailed review with working practices included for £125 to £250. Some firms offer annual packages for ongoing contracts too.
You might also need to pay for IR35 insurance or legal representation if you’re being challenged. This isn’t common for most contractors, but it’s still something to consider, especially in sectors like IT, finance, and engineering.
For me, I’ve spent around £200 to £300 per year on contract reviews and advice just to stay compliant. It’s money well spent, considering the financial risks.
Software and Tools for Contractors
Even if you’re running a lean operation, you’re going to need software. The most important tool in your stack? Accounting software. HMRC-friendly programs like FreeAgent, QuickBooks, and Xero will help you keep track of expenses, invoice clients, and file your taxes correctly.
I started with FreeAgent, which costs about £14 to £30 per month. It syncs with my bank account, helps manage VAT returns, and even generates dividend vouchers. Some contractor accountants bundle FreeAgent into their package, so it’s worth asking before you pay separately.
Then there’s time-tracking software. If you charge by the hour or need to log time for clients, you might want to invest in something like Toggl or Clockify. Many are free, but premium versions can run around £5 to £10 a month.
Invoicing tools, cloud storage, and even things like PDF editors for signing contracts will add up. For me, I also use Google Workspace for business email and storage, which runs at about £5.75 per user per month. Over the year, you might easily spend £200 to £500 just on essential software.
You can also use our free calculators:
- Corporation Tax Calculator
- Inside IR35 Calculator
- Outside IR35 Calculator
- VAT Calculator
- Dividend Tax Calculator
- Sole Trader Tax Calculator
Legal and Compliance Fees
Legal costs are often overlooked, but trust me, you’ll need to budget for them. When I started ContractorPal, I had no idea I needed things like a shareholder agreement, a director’s service contract, or even GDPR documentation.
You might not need a solicitor straight away, but at some point, you’ll want a basic contract template drafted or reviewed, especially if you’re dealing with corporate clients. I paid about £150 for a basic consultancy contract and another £100 to review a client’s version of one.
If you’re handling personal data, even just a mailing list, you’ll also need to register with the ICO (Information Commissioner’s Office). This is a legal requirement under UK data protection law and costs £40–£60 annually.
You can easily spend £200 to £400 on basic legal setup, and more if you deal with complex or long-term contracts.
Office Space or Virtual Address Services
One of the more annoying quirks of running a limited company is that your registered office address is public. If you use your home address, anyone can look it up. Not ideal.
That’s why many people (myself included) opt for a virtual office address. These start from around £25 per year for basic mail forwarding and can go up to £200 or more for prestige addresses or full business services.
I paid £60 for a decent London virtual address, which not only gave me privacy but also looked more professional on invoices and correspondence.
If you do decide to rent coworking space or an actual office, that’s a different story entirely. Costs there can range from £150 to over £500 a month, depending on the location. But for most new contractors, a virtual office will do just fine.
Marketing and Branding Essentials
When you’re just starting out, you might think you can skip branding. But trust me, having a clean, professional online presence is a game-changer. It’s not just about looking good—it builds trust.
I bought a domain name for ContractorPal for about £10 a year and paid around £50 for reliable web hosting. I used WordPress to build the site myself, but if you hire a web designer, expect to pay at least £300 to £1,000.
I also invested in Google Workspace for my email, which gave me a @contractorpal.co.uk address instead of something like [email protected]. That alone made me look 10x more professional to clients.
As for branding, I spent £120 on a logo via Fiverr. You could spend less or more depending on the design quality you want.
Marketing costs will vary, but it’s smart to budget at least £200 to £500 for setup if you want a decent website, email, and branding.
Travel and Work Equipment Costs
Even if you work mostly from home, travel and equipment are costs you can’t avoid when running a limited company. I still remember my first contract that required regular site visits. I hadn’t budgeted for travel, and those train tickets piled up quickly.
If you’re travelling for meetings or client work, you can claim mileage if you’re using your own car—currently 45p per mile for the first 10,000 miles per year. Alternatively, train and bus fares can be claimed as business expenses too, but they’ll still need to be paid upfront. Depending on how often you’re on the move, travel can cost you anywhere from £300 to £2,000 annually.
Then there’s the gear. You’ll need a laptop capable of handling whatever your work requires, mine cost £1,200, and I claim capital allowances on it through my company. You’ll also need accessories like a decent monitor, mouse, webcam, maybe a microphone if you do a lot of calls or presentations. Add to that software licenses like Microsoft 365, Adobe Creative Suite, or project management tools depending on your industry.
Most new contractors can expect to spend £1,500 to £3,000 on equipment and software in the first year. The good news? Most of it is a one-time investment, and almost all of it is tax-deductible.
Your Own Salary and Dividends: What to Expect
One of the best parts about having your own limited company is the ability to pay yourself in a tax-efficient way. That said, there are still costs involved, especially if you want to do it properly.
Most contractors take a low salary (just above the National Insurance threshold) and top up their income with dividends. This setup reduces your Income Tax and National Insurance liability. But to manage it, you’ll likely need your accountant’s help to stay compliant with HMRC rules.
You’ll need to set up payroll to pay yourself that small salary, your accountant may include this in their package, or it might cost an additional £10 to £20 a month. Dividends must be accompanied by vouchers and board meeting minutes, which again, your accountant should handle.
So, even though you’re not “paying” a traditional salary with PAYE deductions, there are still some behind-the-scenes admin costs. Overall, budget around £100 to £200 a year just to manage salary and dividends correctly—on top of your accountant’s main fees.
When You Need a Solicitor
It’s not something that comes up every day, but sooner or later, you’ll need legal advice. When that time comes, having a good solicitor in your corner can save you thousands, or even your business.
When I landed my first big contract with a multinational, their legal team sent over a 24-page consultancy agreement full of jargon and clauses I didn’t understand. I spent £300 to have a solicitor review and explain the risks. It was money well spent.
Other scenarios where you might need legal help include resolving payment disputes, setting up shareholder agreements if you bring on a partner, or protecting your intellectual property.
A basic contract review can cost £150 to £500, while more complex legal services might run into the thousands. Still, it’s better to spend a few hundred pounds now than end up in court later.
Funding Options: Loans, Grants, and Start-Up Reliefs
When you first set up a limited company, it might feel like all you’re doing is spending money. But don’t forget, there are some ways to get money in as well.
The Start Up Loan Scheme from the British Business Bank is a great option. It offers up to £25,000 in funding with a fixed interest rate and access to free mentoring. I didn’t take this route myself, but a friend of mine used the loan to cover initial setup, equipment, and marketing costs.
You might also be eligible for grants, especially if you’re doing something innovative or working in a region with enterprise incentives. These are harder to find, but sites like gov.uk or local LEP (Local Enterprise Partnership) portals list current options.
Then there’s SEIS (Seed Enterprise Investment Scheme), which allows early investors in your company to claim back 50% of their investment as tax relief. It’s mainly useful for startups looking to grow quickly, but it’s still worth knowing about.
I didn’t go the funding route because I started small and used savings, but I know contractors who used loans or grants to get off the ground without burning through personal cash.
What I Paid to Set Up ContractorPal?
Just to give you a sense of what this all looks like in real life, here’s a quick summary of my first-year costs when I set up ContractorPal Ltd:
- Company Formation with Agent: £40
- Accountant (contractor specialist): £1,140/year (£95/month)
- Insurance (PL, PI, EL): £420
- Domain + Hosting + Email: £110
- Website Design (DIY): £0 (used a template)
- Business Bank Account: £0 (Starling)
- Office Equipment: £2,100 (MacBook, monitor, accessories)
- Legal Contract Review: £300
- ICO Registration: £40
- Virtual Office Address: £60
- Software (FreeAgent via accountant): £0
- Travel and Misc. Expenses: £600
Total: Approx. £4,810 for the first year
Of course, not every contractor needs to spend this much. You could easily start for half of this if you’re frugal and already own your equipment. But if you want to look professional, avoid tax mistakes, and stay compliant, this is a realistic figure.
Tips to Keep Costs Down When Starting Out
One of the biggest lessons I learned early on? Spend money where it matters, and be ruthless with things that don’t add value. For instance, don’t splash out on a fancy logo or website until you have paying clients. Focus on the essentials: formation, banking, accounting, and insurance.
Use free tools when possible. Google Docs instead of Microsoft Office. FreeAgent through your accountant instead of paying separately. DIY your website with a WordPress template. And don’t be afraid to shop around for insurance and legal services, there’s a lot of competition.
Most importantly, ask questions. Talk to other contractors, join online communities, and read blogs like this one. The more you know, the more you save.
FAQs About Setting Up a Limited Company in the UK
1. Do I need a business address to set up a limited company?
No, but your registered office address will be public. You can use your home, but most contractors prefer a virtual office for privacy.
2. Can I set up a limited company without an accountant?
Yes, but it’s risky. Mistakes in tax returns or payroll can be expensive. A contractor accountant is a smart investment.
3. What’s the cheapest way to register a company?
The cheapest is £12 through Companies House. But many opt for a formation agent for simplicity and added services.
4. How long does it take to set up a limited company?
Usually 24 hours if done online. Postal applications take longer.
5. Can I use personal bank accounts for my limited company?
Technically, no. HMRC expects separate accounts, and most clients will too.
6. Do I need insurance if I’m just starting out?
Yes, especially if you’re dealing with clients. Public and professional liability insurance are crucial.
Is It Worth It? My Honest Advice
Starting a limited company in the UK isn’t just about filling in a form and printing business cards. It’s a full-on responsibility, and the costs can add up quickly. But for me, it was 100% worth it.
Having control over my business, the ability to grow, and the freedom to manage my own finances? That’s priceless. The key is knowing what to expect, planning your budget, and getting the right help.
So if you’re on the fence, I say go for it, just go in with your eyes open. The setup costs might be more than you think, but the long-term rewards are absolutely worth it.