Limited Company v Sole Trader
18th December 2023Minimising 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 2024/25, a limited company results in a lower overall tax/NIC charge when profits are £50k-75k, than a sole trader. However this is unlikely to allow for the extra accountancy fees incurred through trading as a limited company. When profits now increase to £100k it swings back to a Sole Trader being more beneficial:
Annual Profits |
|||||
£25,000 |
£50,000
|
£75,000 | £100,000 | ||
Sole Trader |
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NIC | |||||
– Class 2 | – | – | – | – | |
– Class 4 (8%/2%) | 994 | 2,994 | 3,511 | 4,011 | |
Income Tax | |||||
– 20% | 2,486 | 7,486 | 7,540 | 7,540 | |
– 40% | – | – | 9,892 | 19,892 | |
total | £3,480 | £10,480 | £20,943 | £31,443 | |
Limited Company |
|||||
Corporation Tax | |||||
– 19%/25% | 2,945 | 7,695 | 13,608 | 20,233 | |
Income Tax/NIC | |||||
– Various rates | 786 | 2,558 | 7,009 | 13,210 | |
total | £3,731 | £10,253 | £20,616 | £33,443 | |
Lowest Tax/NIC | Sole Trader | Company | Company | Sole Trader | |
Saving: | £251 | £227 | £326 | £2,000 |
Note
The above does assume a full distribution of profits, if you are looking to reinvest the profits rather than withdraw them then there could be further savings to be made.
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
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IR35 tax,
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Use of other family members’ tax allowances and reliefs,
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Timing of tax payments,
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The profit or loss profile of the business over time,
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The loss of child benefit
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Future, further unforeseen changes in tax rules.
Commercial matters
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Protection,
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Confidentiality,
- Image and credibility in the marketplace,
- Client expectations (particularly for consultancy assignments),
Cost and practical matters
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Audit,
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The additional administration work and professional fees as a limited company,
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The discipline required in keeping personal finances separate from business finances,
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Credit rating,
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Use of certain words in the business name,
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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:
- Directly employed (on the books)
- Self employed/sole trader consultant
- Limited company contractor (IR35 non applying)
- Limited company contractor (IR35 applying)
- 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 Amanda Newman 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.