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Apex Accountants prepare, audit, and file statutory accounts helping businesses in and around in Southampton, Fareham and Gosport.

Sole Trader vs Limited Company

Every business, no matter how big or small, must have a legal corporate structure. One of the most important questions you should ask yourself when starting a business is; "How should the business trade?". There has always been a debate about whether being a sole trader or a limited company is better. Here we will look at the pros and cons of both structures.

What is a sole trader?

A sole trader is essentially a self–employed person who is the sole owner of their business. It's the simplest structure and the easiest to set up and manage – it's the most popular in the UK. To operate as a sole trader you simply need to visit GOV.UK website and follow the steps.

What is a limited company?

A limited company has its own legal identity, separating it from the shareholders (owners of the business). This is the case whether there is just one shareholder operating the business alone, or if there are multiple shareholders. Under this structure, the liability of the owners is limited to the amount of capital they have invested.

Sole Trader – Pros and Cons

  • Quick and easy to set up and no requirement to register with Companies House
  • More privacy – information about the business is not listed on Companies House
  • Typically low start up costs and no registration fee to HMRC
  • Fewer legal administrative requirements, only a self assessment tax return once a year (visit our blog on self assessments for tips)
  • You will own all business profits and can move money freely between business and personal accounts without tax implications
  • You will have unlimited liability for all debts and legal claims.
  • The tax rate is higher (20-45%) than corporation tax paid by businesses (19%). You will also be required to pay NI contributions.
  • Creditors and lenders are more tentative, you may be required to personally guarantee any borrowings or credit
  • Can only be set up and owned by one person, giving the owner sole responsibility for the whole operation

Limited Company – Pros and Cons

  • Minimal personal liability. The company is a separate legal entity, meaning if your business runs into trouble, your personal assets are secure. The business owns all debts and profits.
  • A professional image. Investors, banks and other businesses are usually more likely to deal with limited companies, largely due to the closer regulatory attention given to incorporated companies.
  • Tax efficiency. Limited companies currently pay 19% on profits, as opposed to the 20–45% charged to sole traders.
  • You can reduce your income tax and NI contributions by taking remuneration via a mix of dividends and salary.
  • Brand protection. Once your company name has been incorporated, it can't be used
  • More administrative requirements. You must be registered with companies house, pay a registration fee and file an annual confirmation statement.
  • Stricter procedures are in place when it comes to withdrawing money from the business
  • May need to appoint an accountant to help with tax affairs as limited companies are regulated and more closely monitored.
  • Personal and company information is required to be made public on companies house for the benefit of stakeholders
  • A tighter legal structure is in place to regulate limited companies and how they operate.

Top Tips for Self-Assessment

Self-assessment tax returns can be daunting, below we give you some of the best tips to relieve some of the stress. If you stick to these throughout the year, you will reap the rewards when it is tax time!

  • Make sure you are registered
  • Keep ALL receipts
  • Have your income statement prepared
  • Allow for NIC contributions
  • If you have also been employed, keep all payslips or your P60 document
  • Track your business mileage
  • Track your time spent working from home
  • File early! Leaving it until the last minute will only increase your stress levels

Tax Tracking 2020-2021

How Can I Plan for Tax?

This is by far the most common question I get from self–employed clients. The truth is it's relatively easy if you're tracking your income and expenses.

  • Everybody in the U.K can earn £12,500 before being taxed. This is your personal allowance.
  • If you are a sole trader, you will pay 20% income tax on your trading profits (minus your personal allowance).
  • You'll then pay Class 2 National Insurance contributions of £3.05 a week if your profits are £6475 or more
  • You'll also pay Class 4 National Insurance contributions if your profits are £9501 or more. Class 4 is calculated as 9% on profits between £9,501 and £50,000 and 2% on profits over £50,000
  • For incorporated companies, the current Corporation Tax rate is 19% and is charged against profits
  • Track the numbers and hopefully your tax bill won't come as a huge, unwanted surprise.


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07734 040488 or email us HERE