Limited Company vs Sole Trader

Close to a seventh of UK workers have taken the decision to work for themselves, and recent estimates suggest there are more than 1.9 million contractors, freelancers and self-employed professionals operating around the country. They choose to work in a range of ways, but two of the most popular are operating as sole traders and through a limited company. If you want to run your own business, these are your options - but which offers the best deal?

The limited company structure ultimately offers the highest rate of take-home pay. Because of the opportunities available for saving tax, the difference can be considerable compared to working as a sole trader on exactly the same turnover. In the end, it’s a question of balancing responsibility with reward.

Limited companies are often viewed more positively than sole traders in some industries and among some sectors of the market - sometimes it’s considered a more professional approach, or viewed more favourable because of the legal protections it offers. Indeed, some major companies and recruitment agencies might decide not to work with sole traders at all.

As a sole trader, you are not liable for the risks surrounding your employment status - that lies with your client. On the other hand, as a limited company you are responsible for proving that you are compliant with IR35 legislation - rules designed to ensure you really are self-employed and tackle disguised employment.

IR35 is not the only obligation you face as a limited company. As a director, you have responsibilities set out under the Companies Act 2006 regarding corporate governance, while you will also have to submit annual accounts as well as corporation tax and VAT returns. On the other hand, as a sole trader all you have to do is send in your personal self-assessment tax return every year to remain compliant.

On the other side of the coin, working through a limited company offers protections that sole traders don’t enjoy. You are separate from the company, so if the worst should happen and the business enters difficulties, so long as you’ve met your obligations as a director you are not at risk of personal financial loss. Sadly, for those who choose to work as a sole trader, personal finances and possessions will be at risk.

Setting up as a Limited Company compared to setting up as a Sole Trader involves a few additional steps such as; setting up a business bank account and incorporating your company, all of which a specialist accountant like Brookson can assist you with. To set up as a Sole Trader you simply need to register yourself (your business) with HMRC and arrange insurance cover.

Limited companies offer lots of opportunities to minimise your tax liability, meaning that even though you submit the most financial information to HMRC, it’s actually the most tax-efficient way of working. There are various reliefs on offer, as well as opportunities to claim for expenses and VAT. In contrast, sole traders are liable for paying tax on all of the revenue earned.

Limited Company Vs Sole Trader - FREE consultation and take home pay illustration

If you would like to understand more about your working options and how they affect you financially and the levels of day-to-day responsibility then you will find our free, no obligation consultation and take home pay illustration really helpful.

Simply tell us the sector you work in, your annual income or agency rate, hours per week and any business expenses you incur - and we'll do the rest!

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