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So you’re thinking of starting a business.  Should you set yourself up as a limited company or a sole trader?  They both have advantages and disadvantages and depends entirely on your individual circumstances.  It used to always be tax beneficial to set up as a limited company.  However, since the introduction of dividend tax, this is not now always the case.

Being a sole trader is the most simplest business structure you can set up but it can leave you unprotected in certain legal situations.  A limited company requires much more paperwork and compliance (so therefore increased accountancy fees) but can in certain circumstances (but not all) protect you personally.

Here are the key differences:

 

 

Sole Trader

 

Limited Company

Structure

You are the owner of the business, there is no legal separation.

A limited company is its own separate legal entity.   It is controlled by shareholders and directors who have obligations towards the company.

How do I take income

The profits of the business are your income and you can draw them out.

Income would be taken in a combination of a low salary through a PAYE scheme and then dividends based on the final profits.

Paperwork

Have to inform HMRC that you are self employed and register for self assessment.

Can produce simple income and expenditure accounts.

One self assessment return to be filed by the owner.

Have to incorporate a company with Companies House and register for Corporation Tax.

Have to produce financial statements that meet financial reporting standards which are submitted to Companies House.

Corporation tax return to be filed.

PAYE scheme needs to be run in order to process directors wages.

Dividend vouchers need to be produced for dividends taken.

Have to register directors / shareholders for self assessment.

Self assessment return to be filed by each shareholder/director.

Confirmation statement required annually to be sent to Companies House.

Privacy

Nobody has to see your finished accounts or personal information.

Registrar (summary) accounts are filed with Companies House and can be viewed by the public.

Director’s personal information, such as home address, are also readily available at Companies House.

Expenses

Generally the expenses you can claim for are the same whether you are a limited company or a sole trader.

The exception to this is company cars where as a limited company you would also be liable for P11d taxation on them.

What if my business fails?

You are personally liable for the debts of the business.

The company is liable for its own debts.  In extreme circumstances (such as gross negligence or fraud), Companies House may decide to remove the separation between individual directors /shareholders and the company in which case you would revert to being liable for the company’s debts.

 

Tax Examples

 

Sole Trader

Limited Company

 

Profit:  £20,000

 

Self assessment tax:  £1,800

 

Corporation tax:  £2,272

Dividend tax:        £   120

 

Total tax:               £2,392

 

Profit:  £30,000

 

Self assessment tax:  £3,800

 

Corporation tax:  £4,172

Dividend tax:        £   720

 

Total tax:               £4,892

 

Profit:  £40,000

 

Self assessment tax:  £5,800

 

Corporation tax:  £6,072

Dividend tax:        £1,321

 

Total tax:              £7,393

 

Profit:  £50,000

 

Self assessment tax:  £8,900

 

Corporation tax:  £7,972

Dividend tax:        £1,920

 

Total tax:               £9,892

 

These examples are very simplified and are based on the 2017/18 personal allowances and a corporation tax rate of 19% (which has recently changed from 20%).  Also assumed is a minimal salary for one director at the NI threshold.  Rates and allowances are subject to change annually and individual circumstances would vary.

If you’re still not sure, give us a call on 0333 305 8772 and we can discuss the different options with you.

 

Helen Fielding

1 March 2018