Limited Company v Sole Trader

18th October 2016

Minimising the tax paid on profits is a key aim of most SME businesses. The tax benefits of trading through a limited company, as compared to operating as a sole trader or partnership, soon becomes attractive as profits grow.

As the tax calculations below illustrate, based on the UK tax rates and thresholds for 2016/17 (ie applying the new dividend taxation rules), a limited company still results in a lower overall tax/NIC charge than a sole trader (allowing for the extra accountancy fees incurred through trading as a limited company), whilst profits are above approximately £30k pa:

Annual Profits

£10,000
 £50,000
 £75,000  £100,000

Sole Trader

NIC
 – Class 2  –  –  –  –
 – Class 4  153  3,309  3,809  4,309
 Income Tax
 – 20%  –  6,400  6,400  6,400
 – 40%  –  2,800  12,800  22,800
 total  £153  £12,509  £23,009  £33,509

Ltd Company

Corporation Tax
 – 20%  400  8,400  13,400  18,400
 Income Tax/NIC
 – Various rates  –  1,910  8,070 14,570
total  £400 £10,310 £21,470  £32,970
Lowest Tax/NIC  Sole Trader  Company  Company Company
Saving: £247  £2,199 £1,539  £539

 

Note
In the above comparison, in order to minimise tax in the company example, the salary/dividend remuneration mix has to be optimised.

As well as the amount of direct taxation due on profits, businesses should consider a number of further matters before deciding which of the two trading mediums is best advice:

Other tax matters

  • IR35 tax,
  • Use of other family members’ tax allowances and reliefs,
  • Timing of tax payments,
  • The profit or loss profile of the business over time,
  • The more generous company tax deduction rules,
  • Capitalising goodwill on conversion of existing business,
  • Double taxation,
  • Future, further unforeseen changes in tax rules.

Commercial matters

  • Protection,
  • Confidentiality,
  • Image and credibility in the marketplace,
  • Client expectations (particularly for consultancy assignments),

Cost and practical matters

  • Audit,
  • The additional administration work and professional fees as a limited company,
  • The discipline required in keeping personal finances separate from business finances,
  • Credit rating,
  • Use of certain words in the business name,
  • How long into the future that you believe the business will continue to trade.

If you have a work offer, there are various solutions to how you could be engaged:

  1. Directly employed (on the books)
  2. Self employed/sole trader consultant
  3. Limited company contractor (IR35 non applying)
  4. Limited company contractor (IR35 applying)
  5. Through an umbrella employment agency

If you require assistance understanding and going through your options, to decide what structure is best advice for your particular unique circumstances, please contact Ian Piper for a free initial consultation. Similarly, if you have already decided and are about to become a start-up business, needing help with registration, annual compliance, etc, please contact us.

Other items in Arts & Entertainment
Vanessa Pearson
11th December 2021 Tax exemption of Christmas parties/gifts

Businesses may be hoping they can hold their annual Christmas parties this month. Providing the event is annual, open to all employees and the total cost, including VAT, is less than £150 per person (including non employee guest attendees), this will be a non-taxable benefit in kind (ie free of PAYE tax and National Insurance…

Ian Piper
10th December 2021 COVID: business interruption insurance claims?

Those businesses with comprehensive commercial insurance cover will possibly be covered for ‘business interruption’. This cover will typically include losses arising from events that close or severely disrupt operations. The COVID pandemic has already led to many claims under this. The insurance industry (as you might expect?) has warned that few policies are likely to…

Ian Piper
4th November 2021 Super early retirement? – Not if under 47 now

The government is to increase the earliest age pension savers can access their pension pots from 55 to 57, wef 6 April 2028. Members of the firefighters, police and armed forces public service schemes will not be affected by this increase.

Chris Ridgeon
1st November 2021 Budget: Hospitality Sector

Well, mixed news in the Budget for our hospitality sector, I would say.   A cut in business rates by 50% for qualifying businesses in retail, hospitality, and the leisure sector for a further year will hopefully help with that large overhead. No extension of the temporary reduced rate of VAT beyond 1 April 2022…

Emily Haines
15th March 2021 SEISS for the newly self-employed in 2019/20

HMRC are writing to some individuals who started their sole trade/self-employment in 2019/20 and wish to claim the fourth and fifth self-employment income support scheme grant (SEISS). These individuals will be asked to complete some verification checks to confirm their identity and proof of their self-employment.   These individuals should receive a letter from 8th…

Mike Blackledge
26th November 2020 SEISS 3rd Grant– Guidance issued on how trading conditions affect eligibility

To be eligible to claim for the third Self-Employment Income Support Scheme (SEISS) grant you must either:   be trading and impacted by reduced demand due to coronavirus, or have been trading but are temporarily unable to do so due to coronavirus.   To help businesses understand whether they are eligible for the 3rd SEISS…