Sole trader or limited company: which one to choose?

If you’re looking to work for yourself, then you need to either register as a sole trader or set up a limited company.

Each has pros and cons.

Tax

Sole traders simply pay Income Tax on what you earn from self-employment minus some allowable expenses.

However, if your expenses are not that high or you can’t be bothered with receipts, then simply claiming the flat £1,000 “trading allowance” makes more sense.

If you go the limited company route, then you need to decide how to pay yourself:

  • through a salary: you need to set up a Pay As You Earn (PAYE) scheme so that you can pay regular income tax to HMRC
  • through dividends – and pay dividend tax on them
  • or a combination of both.

The tax you’ll pay on your salary or dividends is on top of the corporation tax of 19% that all companies need to pay on their profit.

The salary is deductible as an expense for your limited company (meaning that you don’t pay tax on it twice), but dividends are not (so technically you do pay tax twice, but since the dividend tax rate is lower, it works out to about the same).

Winner: limited company, but not by much – mostly because you have more freedom in how you pay yourself and what you can expense.

National Insurance

This is one of the biggest differences.

If you’re a sole trader, then you only pay Class 2 and Class 4 NI contributions – depending on your profits from self-employment.

If you run a limited company, you will pay much more: both the employer’s and employee’s National Insurance on your director salary.

Winner: sole trader.

The tax return process

Sole traders only need to file a Self Assessment tax return once a year.

You can try doing it yourself for free or use a tax return service like TaxScouts for just £119.

If you do business through a limited company, then you need to:

  • prepare annual accounts and a company tax return, which you file with HMRC
  • and also file a confirmation statement with Companies House.

Corporation tax returns are much more expensive and you’ll also need to deal with bookkeeping or hire an accountant to do it for you.

Winner: sole trader – by far.

Debts and liabilities

This is another huge difference.

If you’re a sole trader, you are your business. Any business debts become your debts and what you own (including your house!) is not protected.

A limited company can protect you: the loans belong to the company, not you.

Winner: limited company – but only if you need business insurance or a business loan.

Other factors to consider

  • start-up costs: it’s free to register as a sole trader with HMRC (although it’s a bit complicated: TaxScouts can help you register as self-employed for just £25)
  • privacy: limited company directors have to provide their details to Companies House – this info will be public
  • credibility: many companies prefer to do business with other limited companies, or at least with VAT-registered sole traders
  • funding: it’s very difficult to get a business loan as a sole trader.

Switching from one to the other

You can easily do it.

We recommend to start small as a sole trader and, if your business grows, set up a limited company later on.

Need help with your tax return?

Get your self assessment prepared for you online by certified accountants for £119

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How TaxScouts works

Simple online tax assessment

1. Simple online tax assessment

Our online tax-bot will go over your tax situation and will make sure you won’t overpay your taxes.

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2. Chat to human advisors

You can talk to one of our tax assistants at any time during the process when you have any questions.

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3. We’ll sort your documents online

We’ll tell you exactly what documents you need and sort them for you online. You just upload them or snap a picture with your phone.

Everything gets prepared for you

4. Everything gets prepared for you

Your certified accountant will go over your details & prepare your tax return for you to review. It will be filed on your behalf once you approve it.

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Who our service is for

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