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.
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:
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.
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.
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:
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.
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.
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.
Get your self assessment prepared for you online by certified accountants for £119
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At TaxScouts we appreciate that tax returns are highly individual. Before you get assigned an accountant we make sure to understand your circumstances and help you build your optimal tax profile.