Limited company versus sole trader
There are 3 main reasons to consider being limited.
- Tax savings – you can still save tax being limited but the main savings now come from higher rate tax payers who do not need to draw out all of the profits from the bank. You can retain the funds in your business to draw down less dividends which will reduce the amount of higher rate tax you will pay. So if for example you have profits of say 100k, the company will pay 19% corporation tax but if it was all left in the business bank account there would be no dividend tax to pay. The amount of dividends that should be drawn out each year depend on your individual circumstances but many tax payers try to avoid an overall income level of more than c45k which is when the higher rate tax rates kick in.
- Protection – It is well know that a limited company is a separate entity to an individual. This can give you more legal protection and security which is a big bonus for new businesses taking on risk.
- Status – Some customers and suppliers prefer dealing with a limited company. Some businesses may find this irrelevant such as a hair dresser for example but for many business to business sectors this can be significant.
Some basic tax planning tips include;
- Maximising use of home claims for home working
- Ensure you process the right amount for wages, this will either be the NI threshold or the tax allowance depending on how many people are on your payroll. For single director companies we suggest the NI threshold.
- Make sure you don’t lose out on the 2k per annum tax free dividend rate.
- Don’t draw out funds from the business that you don’t need.
- Consider partner’s wages.
Sole trader / partnership
Being a sole trader is easy, way less admin for a start! There’s not really any major tax advantage although the main difference is that it is normally an option to claim a proportion of your motor costs whereas in a limited company we would usually advise to claim a flat mileage rate of 45p per mile.
Some simple tips are;
- Maximise business use claims for motor expenses (hire purchase interest etc can be included), telephone and use of home
- Is your partner involved in the business? Consider paying them a wage.
- Prepare and plan your payments on account. This catches many self-employed people out.
So you have a better idea of the different types of business structure. Now let’s look at the Basic Services and Responsibilities that business owners have. This is an overview.
Self-employed people (Sole Trader)
- You need to at least have a profit and loss account to show the income the business has generated the the expenses that you are claiming
- You will need to file tax return to HMRC by 31st January each year.
- You will need at least a basic bookkeeping system such as a spreadsheet or online software such as Xero and Quickbooks.
- You will need to submit a set of accounts with a balance sheet to companies house 9 months after your year end.
- You will need a more formal bookkeeping system ideally on Xero or Quickbooks
- You may need a payroll scheme to pay yourself in a tax efficient manner.
- You need to comply with various company legislation
- You will still need to complete personal tax return
- VAT registration
- Taking on staff
- CIS for the construction industry
- Tax planning and optimisation