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Sole trader or limited company: which one to choose?

If you’re looking to work for yourself, then you need to choose between becoming a sole trader or setting up a limited company.

Each has pros and cons.

Tax

Sole trader:

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 for yourself
  • through dividends: remember that before paying dividends your company also has to pay 19% corporation tax
  • or a combination of both.

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.

This is why most one-man-band limited company directors prefer to pay themselves only enough salary to qualify for State Pension, and the rest as dividends.

Winner: sole trader.

The tax return process

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

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 legal risks

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.

More guides & useful information

Let us sort your Self Assessment online. £119, all in.

That’s right. No matter how complicated it gets or why you need to do a return in the first place, it’ll cost £119 to get it done. That includes VAT, last-minute changes and all the support you may need.

How it works

1. Answer a few simple questions

And we mean a few. After a couple of minutes of answering questions online we’ll have everything we need to start working on your tax return.

2. Then get paired with a tax accountant

That’s right, you’ll be matched with a real accountant who is best suited to prepare your return. Plus, they’re on hand for questions whenever you need.

3. We file your Self Assessment for you

Once you’ve signed off your return, your TaxScouts accountant will file your return online with HMRC. That’s it! We told you it was simple.