If you’re looking to work for yourself, you’ll need to choose between being a sole trader and a limited company. Each has pros and cons, and understanding the tax implications of each is key to making an informed decision. So let’s explore the sole trader vs limited company tax obligations and get you on the right path to shine. ✨
Let’s pump the brakes here. What is a sole trader? It’s pretty simple actually – it’s the legal term for self-employed people in the UK.
So what’s a limited company (LTD)? It’s an organisation you set to run your business, which means that you wouldn’t be completely or wholly responsible for it. Your business finances will be completely separate from your personal ones.
While they’re also taxed differently, which we’ll get into that shortly, you’re also less liable for the finances and debts of a LTD. They’re not your personal finances or debts, phew.
On the flip side, as a sole trader there’s not much of a legal line between you and your business – your business debts become your personal debts. Any assets you own, like your house or your car, also won’t be protected. You’re also responsible for tracking and reporting your income and then filing a Self Assessment tax return to HMRC. Four words: you’re your own boss. It’s recommended that you explore professional indemnity insurance to keep you as protected as possible.
Another difference is that as a sole trader you register through HMRC, while as a LTD you’re registered at Companies House.
Tax-wise, there are significant differences between the sole trader vs limited company tax structure. Let’s dive deeper into these differences and what they mean for you.
We’re not trying to poop the party, but we are your friendly neighbourhood tax know-it-alls, so we’ll bring tax into it every time.
So with that being said, let’s talk about the different tax implications and how they differ when you’re a sole trader vs a limited company.
Sole trader tax 101(s):
If your expenses aren’t extortionate (or in this case, less than £1,000) or keeping track of receipts isn’t for you, then claiming the tax-free Trading Allowance is the way to go.
And if you want to keep your receipts but prefer storing them online, you can use our AI data-extraction tool to take a picture, and keep it in your account for later use🎉
Limited company tax 101(s):
If you go the LTD route, then first and foremost, you need to decide how to pay yourself. Here are your options:
Whether you go the sole trader route or the LTD route, there are always tax tidbits to consider, making the choice between sole trader vs limited company tax a personal decision rather than a one-size-fits-all one.
National Insurance (NI) contributions also differ between a sole trader vs limited company tax setup.
🚨From 6 April 2024 (the 24/25 tax year onwards), Class 2 National Insurance is being scrapped. If you’re under the threshold and pay them voluntarily to qualify for benefits, you’ll still be able to do so.
At the same time, Class 4 is reducing from 9% to 6%.
The NI contributions are a lot more for an LTD and sometimes small business owners prefer to pay themselves a smaller salary and supplement the rest with dividends.
If you’re a sole trader, good news, you only need to file a Self Assessment tax return once a year.
If you’re not completely sold on getting your tax return sorted and filed for you, we get it. Read our guide on HMRC vs TaxScouts to get the inside scoop on what makes us the obvious choice.
If you do business through a LTD, then you need to:
For many, the tax filing process is one of the deciding factors when comparing sole trader vs limited company tax.
It’s completely up to you whether you start as sole trader and then set up a limited company down the line, or if you set it up straight away.
If you ever want to make a switch to go from sole trader to limited company, it’s a straightforward process 🙌
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