You no not have to become a Limited company.
There are plenty other ways you can do it. True the IR don't like FIs being self employed with only one customer! I started instructing in the same way you are and I was self employed. Don't worry about the IR unless they approach you about it but you could get other customers by flying with a current PPL out of working hours doing a chaeck ride or something. Your flying school could get nasty but remind them that you are not an employee and that you have other customers. But do it tackfully. If they realy don't like it explain the situation and ask for a employed position.
Instead of being a limited company (which I believe there must be a minimum of two directors) become a sole trader. You don't need to register any where other than informing the IR so you can get a tax return, keep records of all flying undertaken, bills and costs.
Good luck e mail me if you need any more info
