Sole trader vs limited company tax

New and old businesses should all consider the pros and cons of sole trader vs limited company tax:

Sole trader

When starting a business, being a sole trader  is the easiest way to do business as this involves much less administration than a limited company. Its easy to register with HMRC at https://online.hmrc.gov.uk/registration/newbusiness

The main task is then prepare a self assessment every year by 31 January. If you make a profit, you need to pay the tax and national insurance to HMRC.

In addition, if you make a loss you can carry this back against your income for the past 3 years, which is useful if you were in employment before setting up your own business.

Limited company

Once you start to make profits it is normally beneficial to create a limited company to take advantage of dividends. This allows you to avoid national insurance and so the tax saving can be significant.

The downside to a limited company is the administrative burden as there is much work and many different forms/filing involved.

From a legal perspective, a limited company is a separate legal entity in the eyes of the courts and so this will normally insulate you and your personal assets from the company’s debts and liabilities, for example in case of any litigation or if the business fails.

Please take a look at our guides for further information:

Using dividends to save tax

Administration in running a limited company

Comparison of sole trader vs limited company tax

The attached file shows a comparison between registering as a sole trader and using a limited company. If your profit is £20,000 you would only save £894. This would probably not be worthwhile from a tax perspective due the hassle involved and accountancy fees. However, as you start to make more profit, a limited company would save you more tax and the saving would make the administrative burden worthwhile. For example, if you had £60,000 profit, the total saving would be £4,039.

Comparison_sole trader_vs_limited company

 

Need help?

Please contact us to discuss your requirements and for help with dealing with self assessments or the administration involved in running a limited company.

 

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