Sole Trader V’s Limited Company – Which is best?

Sole Trader V’s Limited Company – Which is best?

So, you have taken the plunge and decided to start working for yourself. But should you register as a sole trader, or set yourself up as a limited company?

The answer to this could be different for different people. It depends on many factors.

What is the difference between a sole trader and limited company?

A sole trader is a self-employed person who is the owner of their business. There’s no legal separation between the owner, and the business entity.

Sole traders will usually have a business name even though they are one in the same. eg) David Morris T/A Morris Electrical Contractors.

As the business is you, you can begin to trade straight away. You have until 05th October in the second tax year to register with HMRC for self assessment and you don’t need a business bank account although a separate one is advisable.

You own and are personally responsible for any assets, losses and debts of your business. Your personal assets can also become at risk.

A limited company is a separate legal entity from it’s owner, and you can set up as a limited company whether you’re a one-person business or you have employees. As a limited company director, you’re responsible for the legal and financial decisions your business makes, but your business’s assets and liabilities are totally separate from your own individual finances, you only stand to lose what you put into the company.

The company will need to be set up at Companies House and a company bank account opened before you begin to trade.

How are they taxed?

As a sole trader you are personally taxed on every penny of the business profits at the following rates:

  • £12,570 @ 0%
  • £37,700 @ 20%
  • £99,730 @ 40%

Limited companies pay corporation tax on profits at 19%. As a director you only pay personal tax on the amounts you withdraw from the company via salary and dividends at the following rates:

  • £12,570 @ 0%
  • £2,000 @ 0%
  • £35,700@7.5%
  • £99,730 @32.5%

A limited company acts as a savings account, allowing you to only be taxed on what you require personally and has the option to keep within tax banks with some tax planning.

At what point should I go from sole trader to Ltd?

As you approach the higher rate of tax with all income you will really see the limited company tax saving benefits. Corporation tax doesn’t have bands like personal tax and therefore there isn’t a significant jump to consider.

When are the deadlines?

As a sole trader, you will need to complete your self-assessment tax return once a year by 31st January.

With a Limited Company, as a director you will have your self-assessment tax return. You will also have to file accounts and a company tax return to HMRC, due 12 months after the year end. Accounts need to be filed to Companies House, within 9 months of the year end as well as a confirmation statement on the companies anniversary of incorporation.

If you take a salary from your Limited Company, then you will also need to register as an employer and run a monthly payroll.

Personal tax liabilities are due by 31st January after the tax year has ended and 31st July for those in the payment on account system.

Corporation tax liabilities are due 9 months and 1 day after the year end.

This may mean that if a deadline stresses you out, you may want to keep it simple and choose to be self-employed.

Understand you finances?

Although records should be regularly updated for sole traders and Limited companies to monitor turnover for vat and for generally management of a business, recording keeping  for a limited company will need to be better and you have to understand your finances to a certain degree for the withdrawal of dividends, to ensure they are legal.

Other pros and cons

Sole trader pros

  • Low set up costs and lower annual fees
  • Privacy, the business details are not public

Sole trader cons

  • Raising finance can be more difficult
  • Some contractors may only deal with Limited companies

Limited company pros

  • Sound bigger than they are
  • More tax deductible costs available such as pension contributions for directors

Limited company cons

  • Expensive set up and annual fees
  • Company details are public

Don’t forget, whether you decide to do business as a sole trader or a limited company, you’ll need to register with HMRC.