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.


 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

 £75,000  £100,000
Sole Trader

 - 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


 £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


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


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 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.

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