Sole trader or limited company

Should you be a sole trader or a limited company? Find out more about the benefits of forming your own limited business with Company Formations 24.7 today.

It is often the case that sole traders look to formulate a limited company as a natural progression, normally as the amount they earn increases. This is because there are many tax advantages associated with being a limited company vs sole trader, along with lots of other benefits. If you are considering making the transition from sole trader to limited company, consider the below comparisons.

Sole trader or limited company?

Whether or not you choose to move from a sole trader to the director of an incorporated company will depend on a number of factors, such as how much you earn, how much you are expecting to grow, and how much time and money you are willing to invest in running a business. An accountant specialising in self-employed tax matters can help you steer clear of costly mistakes.

Some key points to keep in mind include:

  • As a sole trader, you will need to file a Self Assessment Tax Return, while as the Director of a limited company, you will need to pay Corporation Tax on all taxable profits. As there is a great deal more tax relief available to the director of a company, you can potentially keep a lot more of your take-home pay. As directors typically pay their salary in dividends, which are NI exempt, they can hold on to more of their income. For example, on a salary of £30,000, you could save approximately £1,612 by registering as a limited company.
  • Corporation Tax is levied at 20%, as opposed to rates on income tax that can change with your salary band that ensure you pay more in tax the higher your income.
  • As a sole trader, you are considered to be your business and you are therefore personally responsible for all debts that can amount. Failing to keep up with these debt repayments can potentially render you bankrupt. A limited company on the other hand is a separate legal entity, and therefore it would be your business that becomes insolvent as opposed to you personally.
  • As a sole trader, you are liable to pay both Class 2 and Class 4 National Insurance contributions alongside income tax on your profits.
  • If you want to borrow as a sole trader, you can do so from your business bank account as they are your personal funds. A director can borrow money from the company, but there are both limits and tax implications of doing so as outlined by the Companies Act 2006.
  • As a sole trader, you are not legally obligated to keep accounts, but many people find it is advantageous to stay on top of bookkeeping and remain organised ahead of their self-assessment. You are however legally obliged to prepare annual accounts for tax purposes as the director of a limited company, or to instruct a certified accountant to do so on your behalf.
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