Sole Trader vs Limited Company

We are often asked whether an individual should file taxes as a sole trader or a limited company and what would be most beneficial for them. Whether you’re an IT contractor, NHS locum or a small business entrepreneur, this question can be extremely nuanced and so there isn’t a one size fits all answer. However there are general guidelines and advantages/disadvantages to both which we can take you through.

Sole Trader Advantages

  • Simple - This is the most simple means of reporting to HMRC, both in terms of record keeping for you, paperwork and complexity.

  • Lower Cost - With simplicity comes lower cost, your accountancy fees should be lower and the costs of filing with HMRC should also be lower.

  • Privacy - Setting up a limited company requires submitting publicly available information to Companies House, this includes your name and address.

Limited Company Advantages

  • Tax Efficiency - Corporation tax (19%) is lower than the basic, higher and additional rate income tax thresholds (20%/40%/45%). You would have to pay tax to take money out of the Limited Company but this can be designed in an efficient manner, using the lower taxes on dividends (7.5%/32.5%) (Figures taken as at Nov 2021).

  • Limited Liability - Once you set up a Company you become a director and your own personal assets and the business assets are distinct and protected if the business falls into trouble, this separation is not the case for sole traders.

  • Start Your Journey - Many people find the set up of a Limited Company as driving your flag in the ground and a symbolic moment. Whilst non-monetary we find the business owners we work with take great value of this important moment.

The disadvantages and advantages can be vast and we’ve just touched on a few key ones here, there are also things like expenses, pensions, borrowing, losses etc. to really find what’s best for you a consultation with one of our accountants is the best route. Despite this we appreciate a lot of people want to get the best monetary value and be tax efficient, therefore we’ve drawn up a basic illustration of how much you could take home given current tax rates in each scenario.

 
 

In the above scenarios we freeze all other components (expenses, accountancy fees, other incomes) and just look at how each is taxed. You can see that whilst trading under a limited company the take home earnings are a little better and that benefit grows as income does. Whilst the above illustration is good guide, it uses a lot of assumptions and ignores a lot of factors. For example there are costs associated with running a company monthly payroll, having to register at Companies House and have an accountant file your annual accounts and return - these can outweigh that tax saving you see. Also not all decisions should be tax driven and there are so many other factors as mentioned before. If you’re weighing up the options between the two or need some help on either route, drop us a call or a message and we can give you some honest guidance and find the best outcome for you.

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