Limited Company v Sole Trader

24th January 2016

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  153  153  153  153
 – Class 4  142  3,486  3,986  4,486
 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 Blogs
 
Matilda Mawson
19th July 2019 Changes to Entrepreneurs Relief from 6 April 2019

Entrepreneurs’ relief allows a reduced rate of capital gains tax on disposals of all or part of your business assets. The reduced tax rate is 10% on up to £10 million of lifetime gains. There have been a number of significant changes to entrepreneurs’ relief in the last year, tightening the rules on qualifying conditions…

Read More »

Ernesta Petkeviciute
19th July 2019 New SRA accounting rules – what’s changing?

The current Accounts Rules are made up of over 40 detailed requirements, making it difficult for firms to fully understand what is required of them, as well as giving firms no flexibility to adapt them to their own practices and decide how best to look after client’s money.   The new rules coming into effect…

Read More »

Vanessa Pearson
15th July 2019 IR35: private sector off-payroll rules for contractors

This week HMRC have published draft legislation that will affect private sector personal services companies (PSCs)  from 6 April 2020. PSC’s supplying services to medium or large-sized organisations will no longer decide if they are employed or self-employed, the end engager will assess this. If caught by these rules, known as IR35, employment taxes and…

Read More »

Paul Jefferson
15th July 2019 Company car tax changes – Government will remove BIK company car tax on Electric Vehicles from 2020/21

The government has provided positive news for Company car drivers announcing that a pure electric vehicle (EV) will no longer pay benefit-in-kind (BIK) tax in 2020/21 following a review which looks set to boost sales of emissions-free cars. HM Treasury’s response to its review of the fallout from the roll-out of the Worldwide Harmonised Light…

Read More »

Barbara Nicholas
9th July 2019 31 July: Can you elect to reduce your tax payment?

Most individuals who are required to prepare and submit a self-assessment tax return to HM Revenue & Customs in each tax year should now be preparing for their next half-yearly tax payment which is due by July 31.   This tax is the second payment-on-account for the 2018/19 tax year. It is automatically calculated as…

Read More »

Jaimie King
5th July 2019 Utilising the share premium account

For some privately owned companies, negative profit and loss reserves means that they are unable to pay out dividends as they do not have enough distributable reserves. However, they might have a significant share premium reserve, which is a non-distributable reserve. The Companies Act 2006 allows a private company to utilise the share premium account…

Read More »