Limited Company or Sole Trader

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Should I go Limited if i am a Sole Trader

An often much asked question. It can be a difficult decision as there are many different reasons and factors as to why you should consider this if you are a sole trader, some legal and some tax. One tax factor is that a Limited Company can help save reduce your tax bill compared to being self-employed.

The amount of tax that can be saved depends on the inidivuals profit and circumstance, the table is a guide but gives an indication of the savings in tax and national insurance you are likely to make if you are a sole trader thinking of becoming a Limited Company.

Annual Earnings Total tax if trading with Ltd Co Tax & NI sole trader Saving

ltd company table

Tax & National Insurance differences
Self Employed – the profit (receipts less expenses) that your business makes will be subject to income tax and national insurance contributions (Class 4) and the amount you pay will depend on how much profit you make.

The rate of income tax you pay is essentially the same as that payable on a salary – you still get your personal tax free allowance and then pay income tax at the basic rate (20%), higher rate (40%) and if you are making substantial profits the additional rate (50%).
Class 4 – National Insurance Contributions are also paid on the amount of profit and are again similar to a salary – you will get an exempt amount and then pay at the lower rate (8%) and upper rate (2%).

Additionally, you will have to pay Class 2 National Insurance Contributions – these are not based on profit but are a fixed weekly amount, currently £2.50.
Limited Company – the profit (receipts less expenses) that your business makes now belongs to the company and as such will be subject to corporation tax and the amount your company pays will depend on how much profit it makes.
Currently if the profit is less than £300k it will be subject to the small companies rate of 20%, whereas larger companies would pay the main rate of 26%.
Your own circumstances differ too, as you become a company director and a company shareholder.

In your capacity of company director you will be entitled to pay yourself a salary which will be subject to income tax and National Insurance Contributions (Class 1).

In your capacity of company shareholder you will be entitled to receive dividend income, which the company can pay you from the profit after corporation tax. Dividend income is not subject to National Insurance Contributions and whilst it is subject to income tax the rates are lower; basic rate (10%) ,higher rate (32.5%) and additional rate (42.5%).
It is the taxation of dividend income that generally means this is a more tax efficient way to operate.

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