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Limited Company v Sole Trader

> the tax comparison.

 

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 become attractive as profits grow.

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 As the tax calculations below illustrate, based on the UK tax rates and thresholds for 2015/16, a limited company still results in the lower overall tax charge than a sole trader (allowing for the extra accountancy fees incurred through trading as a limited company), whilst profits exceed approximately £14,000 pa: 

   
 

                         

Annual Profits

£10,000
 £50,000
 £75,000  £100,000
Sole Trader

     
NIC        
 - Class 2  146  146  146  146
 - Class 4  175  3,242  3,742  4,242
 Income Tax        
 - 20%  -  6,357  6,357  6,357
 - 40%  -  3,286  13,286  23,286

 total

 £321  £13,031  £23,531  £34,031
Ltd Company      
Corporation Tax        
 - 20%  -  8,000  13,000  18,000
 Income Tax/NIC        
 - 12%/40%  233  1,081  6,081 11,081

total

 £233 £9,081 £19,081  £29,081
Lowest Tax  Sole Trader  Company  Company Company
Tax saving:  £88   £3,950 £4,450   £4,950

 

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

  • 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
  • Goodwill on conversion
  • Double taxation.
  • Future, further unforeseen changes in tax rules.

Commercial matters

  • Protection
  • Confidentiality
  • Image and credibility in the marketplace

  • Client expectations 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.


  Related Services

Tax planning
Business tax

 Starting in business

IR35

National Insurance  



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