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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, are attractive for businesses with modest profits.

Specialist


Ian Piper: Company v Sole Trader Specialist

 As the tax calculations below illustrate, based on the UK tax rates and thresholds for 2014/15, 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 £16,500 pa: 

   
 

Annual Business Profits

£10,000
 £50,000
 £100,000  £200,000
Sole Trader

     
NIC        
 - Class 2  143  143  143  143
 - Class 4  184  3,215  4,215  6,215
 Income Tax        
 - 20%  -  6,373  6,373  6,373
 - 40%/45%  -  3,254  23,254  69,754

 total

 £327  £12,985  £33,985  £82,485
Ltd Company      
Corporation Tax        
 - 20%  409  8,409  18,409  38,409
 Income Tax        
 - 40%/45%  -  575  10,575 35,258

total

 £409 £8,984 £28,984  £73,667
Lowest Tax  Sole Trader  Company  Company Company
Tax saving:  £82   £4,001 £5,001   £8,818

 

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 issues before deciding which of the two trading mediums is most appropriate:

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 require assistance understanding and going through these various factors, to decide whether a limited company or sole trader structure is best advice for your particular unique circumstances, please contact Ian Piper for a free initial consultation.


  Related Services

Tax planning
Business tax

Starting in business

IR35

National Insurance  



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