Do you want to work for yourself?

If you’re looking to work for yourself, then you need to choose between becoming a sole trader or setting up a limited company. Each has pros and cons.

Tax

Sole Trader:

  • You’ll pay Income Tax on what you earn from self-employment minus some Allowable Expenses
  • If your expenses are not that high or you can’t be bothered with receipts, then claiming the flat £1,000 “Trading Allowance” is much easier

If you go the limited company route, then you need to decide how to pay yourself:

  • Through a salary: you need to set up a Pay As You Earn (PAYE) scheme for yourself
  • Through dividends: remember that before paying dividends your company also has to pay corporation tax
  • Or a combination of both

National Insurance

This is one of the biggest differences:

  • If you’re a sole trader, then you only pay Class 2 and Class 4 NI contributions
  • If you run a limited company, you will pay much more: both the employer’s and employee’s National Insurance on your director salary

This is why most one-man-band limited company directors prefer to pay themselves only enough salary to qualify for State Pension, and the rest as dividends.

The Tax Return Process

Sole traders only need to file a Self Assessment tax return once a year:

  • You can try doing it yourself for free
  • Or use a tax return service like ANY Accounting

If you do business through a limited company, then you need to:

  • Prepare annual accounts and a company tax return, which you file with HMRC
  • And also file a confirmation statement with Companies House

Corporation tax returns are much more expensive and you’ll also need to deal with bookkeeping or hire an accountant to do it for you.

Debts and Legal Risks

This is another huge difference:

  • If you’re a sole trader, you are your business. Any business debts become your debts and what you own (including your house!) is not protected. However, a good professional indemnity insurance should be sufficient for most sole trades
  • A limited company can protect you: the loans belong to the company, not you

Other Factors To Consider

  • Start-up costs: it’s free to register as a sole trader with HMRC
  • Privacy: limited company directors have to provide their details to Companies House – this info will be public
  • Credibility: many companies prefer to do business with other limited companies, or at least with VAT-registered sole traders
  • Funding: it can be difficult to get a business loan as a sole trader

Switching From One To The Other

It’s easy to do and shouldn’t be a problem if you want to make a change. It’s completely up to you whether you start as sole trader and then set up a limited company down the line, or if you set it up straight away.

Want to know more?

We understand this concept may be confusing, that’s why we offer a free consultation to discuss your situation and requirements! Our accountancy services are available nationwide, including: Accrington, Bamber Bridge, Buckshaw Village, Blackburn, Burnley, Chorley, Colne, Clitheroe, Darwen, Hurst Green, Lancaster, Lostock Hall, Longridge, Leyland, Penwortham, Preston, Skipton and the surrounding areas.

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