Sole Trader vs Limited Company - Which is better for you

Sole Trader vs Limited Company – Which is better for you

Listed below are the key differences between being Sole Trader or Limited Company, to help you make a decision on the best option for your business.

 

What is a Sole Trader?

Being a sole trader is the most popular form of business structure – probably down to the fact that is it so simple to set up and get started. essentially, it’s a self-employed person who owns the whole of their business.

Tax and National Insurance is paid on business profits, which is required to be submitted and paid to HMRC by 31st January after the end of the tax year via self-assessment tax return, e.g. the tax year ending 5th April 2019 would need to be submitted by 31 January 2020.

 

What is a Limited Company?

Being a limited company is a structure of business that has been incorporated with Companies House and has it’s own legal identity. It is completely separate from its owners and managers no matter how big or small the business is.

Tax is paid on business profits, which is required to be paid to HMRC 9 months after the business’ financial year end and filed 12 months after the financial year end. National insurance is paid by the employer and employee(s) on the wages.

 

Tax

Based on the 2018/19 tax year for England, Wales and Northern Ireland:

For a Sole Trader the tax rates and thresholds are as follows:

  • The tax free personal allowance is £11,850
  • Basic rate tax of 20% is payable on profits between £11,851 and £34,500
  • Higher rate tax of 40% is payable on profits between £34,501 and £150,000
  • Additional rate tax of 45% is payable on profits above £150,000

For a Limited Company The tax rates and thresholds are as follows:

  • No tax free allowance. However, the director(s) personal allowance is usually used up by running a basic salary of around £11,850
  • Corporation tax of 19% is charged on business profits of any level (regardless of it being £10,000 or £1,000,000)

For a Limited Company there is also a tax for dividends (dividends are determined from the profits drawn from the business by it’s shareholders) and the rates and thresholds are as follows:

  • The tax free dividend allowance is £2,000
  • Basic rate tax of 7.5% is payable on dividends between £2,001 and £34,500
  • Higher rate tax of 32.5% is payable on dividends between £34,501 and £150,000
  • Additional rate tax of £38.1% is payable on dividends above £150,000

 

National Insurance

Based on the 2018/19 tax year for England, Wales and Northern Ireland:

For a Sole Trader the national insurance rates and thresholds are as follows:

  • Class 2 national insurance of £2.95 per week is charged to sole traders who exceed profit levels of £6,205. Alternatively it can be paid voluntarily if below this amount.
  • Class 4 national insurance is charged at 9% on profits between £8,424 and £46,350
  • Class 4 national insurance is charged at 2% on profits above £46,350

For a Limited Company the national insurance rates and thresholds on wages are as follows:

Employees:

Category letter £116 to £162 a week £162.01 to £892 a week Over £892 a week
  • A
0% 12% 2%
  • B
0% 5.85% 2%
  • C
N/A N/A N/A
  • H
0% 12% 2%
  • J
0% 2% 2%
  • M
0% 12% 2%
  • Z
0% 2% 2%

Employers (limited companies who employ more than one person receive a national insurance allowance of £3,000 before any is payable):

Category letter £116 to £162 a week £162.01 to £892 a week Over £892 a week
  • A
0% 13.8% 13.8%
  • B
0% 13.8% 13.8%
  • C
0% 13.8% 13.8%
  • H
0% 0% 13.8%
  • J
0% 13.8% 13.8%
  • M
0% 0% 13.8%
  • Z
0% 0% 13.8%

 

Appearance

Within the business world, being an incorporated limited company has more of an established sound and could give potential clients/customers the reassurance of using your services or purchasing your goods. A lot of people set off in business as a sole trader to find their feet, once things feel a little more established and profit levels are regular then that’s when they change over to a limited company.

 

Hopefully this article has answers some key questions for you on the differences between limited companies and sole traders.

Take a look here at what we do to help:

Sole Trader

Limited Companies

 

If you have anything else you are stuck with please contact our office.

01243 682 002

Our staff are always on hand to answer any questions you may have.