Sole trader or limited company

We are often asked to judge whether it’s better for a business to be run as a sole trader, or incorporated as a limited company.

The risk argument is fairly straight forward. If your trade or service provided involves risk, and a risk that it is difficult to fully insure, then the limited company is the best route. The only assets at risk will be those owned by your company. Your personal assets will be safeguarded.

If there is no significant risk, the next criteria to test is taxation. Which option generates the lower tax and NIC bill and provides you with more take home pay?

At the lower end of the spectrum, say taxable profits up to £20,000, it is probably better to be a sole trader, as any perceived tax benefit will likely be eliminated by the increased costs of running a limited company.

In the mid-range, profits between £20,000 and £200,000, you will save tax and NIC by being limited. Above £200,000 you may be better off being a sole trader.

However, these assumptions only apply if you withdraw everything you earn from your business. If you want to retain profits in your business, then the picture changes dramatically.

For example, if your company made £200,000 trading profit and you drew out £50,000 in salary and dividends and paid any corporation tax due, the company would be able to retain £114,000. This is cash that the company would be able to use to invest in the business. The combined take home pay and retained funds in the business would now be some £42,000 more than if you had paid tax and NIC as a self-employed person. The reason; as a self-employed sole trader you would pay tax at income tax rates on all your profits, even those you left in the business, whereas the company would only pay corporation tax at the lower 19% rate (2017-18).

There is no substitute for looking at this number crunching process on a case by case basis. If you are contemplating a new business venture and you are unsure what structure you should choose, please call so we can look at the options taking all of the above options into account.

Latest Blog
07
Dec

Planning for higher corporation tax rates

We are fifteen months away from a radical upward lift in corporation tax (CT) rates. ...

Read More
02
Dec

Tax Diary December 2021/January 2022

1 December 2021 – Due date for corporation tax payable for the year ended 28 Fe...

Read More
02
Dec

Budget bad news 27 October 2021

Readers should take note of the following changes: Income Tax Allowances frozen: The ...

Read More
02
Dec

Budget bonuses 27 October 2021

There was little good cheer in the Chancellor’s announcements to parliament on ...

Read More

CONTACT SIMON COOPER