Tax laws and obligations can be mystifying for businesses of all sizes, even large nationwide businesses.
As a sole trader or limited company, tax requirements can feel particularly confusing and we often see people overpaying their tax, because they aren’t sure what requirements apply to them.
At Keith Willis Associates, we are business tax specialists, advising businesses of all sizes, including sole traders and limited companies.
So, to help you better understand your tax obligations – and ensure you’re following the best financial route for your business! – we’ve shared our quick guide to sole trader and limited company taxes.
What are the different types of tax that you need to pay?
In the UK, the differences in taxation requirements for sole traders and limited companies are as follows.
Sole traders:
Income tax (with report earnings submitted through Self Assessment)
National insurance contributions (both Class 2 and Class 4 contributions, calculated based on your profits)
Limited companies:
Corporation tax (calculated based on your profits. Typically, this is a lower rate than income tax)
Personal taxation (on your salary and dividends, which you have received from your business)
Here at Keith Willis Associates, we have a wide range of clients, including sole traders, freelancers (self-employed) and Limited companies. We can cater for all types of business, small to large – across Nottingham, the wider East Midlands, and London. If you need advice on tax, or want to enquire about our services, contact our team to book a consultation.
Pros & Cons - Limited company vs Sole Trader taxes
As a result of these differences, deciding whether to operate as a sole trader or a limited company can have a significant impact on the amount of tax that you have to pay.
However, at the same time, both approaches also bring their own specific advantages and disadvantages. Let’s look into these in more detail.
Pros & Cons - Sole Trader:
Pros:
Simple and easy to set up, as you will be subject to fewer legalities
Greater control over key business decisions, including your profits
Keeping all your financial information private
Less formal, making it less hassle for smaller businesses and new startups
Cons:
Liability is not limited, meaning if your business is in debt, your personal assets would be at risk. Higher personal tax rates (particularly if profits increase beyond fixed thresholds)
Pros & Cons - Limited company:
Pros:
Liability is reduced, meaning your personal assets are protected
Scope to save the amount of tax you are paying (especially if your businesses’ profits increase)
Allow you to establish greater credibility, and a more professional appearance
Cons:
More complex administration
Greater responsibilities for management and legal compliance
Publicly accessible financial records
Should you become a Limited company, or stay as a Sole Trader?
If you’re currently operating as a sole trader, and are considering transitioning to a limited company, we would recommend asking yourself these key questions:
What are your current profits? Do they exceed the Higher Rate threshold (£50,271), which would mean you’re being taxed at 40% for those profits.
Are your profits expected to increase, so that they surpass this threshold?
Have you checked the responsibilities that come with operating as a limited company and do you feel comfortable with managing these legalities and responsibilities?
Do you have the time to manage the additional admin of statutory records and financial filing?
If the answer to these questions is ‘yes’, then transitioning to a limited company is probably a very good option for you and your business.
Before you make the jump, however, we’d recommend consulting a professional financial advisor, like us. This way, you can access dedicated, personal guidance about what the transition would mean for you, and the associated pros and cons.
If you’d like support with your business finances, or want more information about the financial requirements that come with becoming a limited company, Keith Willis Associates are here to help.
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