Sole trader vs. Limited company

[JAY]

Hi All,

Basically I'm in the process of starting my first business, a online service and I need advice on what I should register myself as, a sole trader or a limited company.

I want to register as a limited company because that gives a more professional/bigger image of my business. But I'm worried about the amount of tax I will have to pay. What I know so far is, If I was earning over £300,000 I will have to pay corporation tax of 30% plus income tax for myself of around 40%, so I have to give away 70% of my money??!?!

Is the above true? if it is, is there any ways around this? And if I'm wrong then how does it really work?

Thanks for your help in advance

[MikeH]

With the amount of money that you are referring to I would strongly suggest that you see an accountant or tax professional. There may well be benefits to forming a limited company as monies can be paid in dividends and salary. Your monetary example is a little bit too simplistic. If you pay salary from a business then it reduces profit and therefore your corporation tax. If you pay dividends this is liable for corporation tax but it is not taxed directly again as PAYE. However there will be pro's and con's to both sides of this so seek professional advice.

Mike.

[Joyous]

Hi Jay

Thankfully the tax system is not as harsh as you describe above.

If you set yourself up as a limited company then all profits that the company earns are subject to corporation tax. Income tax only becomes an issue when you pay yourself a salary and/or a dividend from your company’s earnings.

The corporation tax rates are as follows:

Profits of £0 to £10k - starting rate of 0%
Profits between £10,001 and £50k – small companies’ rate (19%) less marginal relief
Profits between £50,001 and £300k – small companies rate of 19%
Profits between £300,001 and £1.5m – main rate (30%) less marginal relief
Profits over £1.5m – main rate of 30%

So you can see that as a limited company your first £10k’s profits are tax free – assuming that you don’t pay yourself a salary or dividend. You don’t pay tax at 30% until your profits hit £1.5m.

Any salary that you pay yourself will reduce your profit and consequently your corporation tax liability, however you will have to pay income tax on it. Note that income tax is only due on any salary/dividend that you pay yourself and not on the profits of the company.

If you choose to do business as a sole trader all of your profits (less your personal allowances) will be subject to income tax. The rates are as follows:

Starting rate 10% on profits of 0 - 2,090
Basic rate 22% on profits of 2,090 - 32,400
Higher rate 40% on profits over 32,400

So using your £300k figure as a limited co you’d pay CT at the rate of 19%, compared to the 40% in income tax you’d pay as a sole trader.

This is only an outline of the situation, so along with Mike above I’d strongly suggest that you speak to an accountant.

Regards

Joy

[Eagle]

That doesn't sound fair at all. So if I ran a Company rather than a Sole Tradership I'd pay no tax under 10k?

I think I'll go Ltd.....

[MikeH]

Hi Eagle,

Yes, the first 10K is not liable to corporation tax and there are some considerable benefits to forming an LTD. However, as with everything there are two sides to the argument. You will have greater administrative responsibilitites to Companies House. Annual accounts will need to be prepared by an accountant and submitted to CH for the public record. This may not be too problematic though. If accurate records are kept and your inputs and outputs are not too complicated then your accounting fees may be quite small.

Mike.

[Eagle]

Thanks. What's considered salary? An actual wage? Could the profits be spent?

[MikeH]

There are two main ways of paying yourself through an LTD. Salary or wages as any other company pays an employee. You pay yourself a salary that the business can afford and cough up the usual Tax and NI contributions as an employee. The business then has to pay its NI contributions. Alternatively as a shareholder you can pay yourself the basic tax free amount in salary and withdraw profits as dividends.

Yes profits can be spent, you do not have to leave funds in the company.However, as the first 10K of profit is corporation tax free you may choose to leave this in the business to be drawn the following year or invested as you see fit.

Mike.

[peterjhale]

the great thing about drawing dividends is, although you will have to pay personal tax on it, you don't pay national insurance - a big 11% saving


Teneric have always been a ltd company

[AminderAthwal]

Hi

I have been told if trading as a limited company, you are able to take out of the business £15,000 for each director and this is tax exempt. Is this true?

[peterjhale]

not true - all income is taxable