Self employed vs Limited company
Self-Employed (Sole Trader)
As a self-employed individual, you operate your business as an individual and are personally responsible for all aspects of the business.
You are not required to set up a separate legal entity, and the business income and expenses are included in your personal tax return.
Simplicity: It is relatively straightforward to set up and manage as a sole trader.
Flexibility: You have full control over the business and decision-making.
Less admin: Lower administrative and compliance burden compared to running a limited company.
Unlimited Liability: You are personally liable for any business debts or legal issues.
Taxation: As a sole trader, you pay income tax and National Insurance Contributions (NICs) on your profits based on the prevailing tax rates for self-employed individuals.|
A limited company is a separate legal entity from its owners (shareholders), providing limited liability protection.
You need to incorporate the company with Companies House and follow the legal requirements of running a company. You can incorporate a business for free with Ember here.
Limited Liability: Your personal assets are protected as the company is a separate legal entity.
Tax Efficiency: Limited companies can offer more tax planning opportunities.
Professional Image: Operating as a limited company can enhance your credibility with clients and business partners.
Increased Administration: There are more administrative obligations, such as maintaining statutory records, filing annual accounts, and managing company finances.
Stricter Regulations: Limited companies need to comply with company law and financial reporting standards.
Less Privacy: Financial information, such as annual accounts, is publicly accessible through Companies House.
Tax Efficiency and Optimal Point for Limited Company
The point at which operating as a limited company becomes more tax-efficient compared to being self-employed depends on various factors, including your level of income and expenses, and individual circumstances. Generally, when your profits exceed a certain threshold, it can be more tax-efficient to operate as a limited company due to the following reasons:
Corporation Tax: Limited companies pay corporation tax on their profits, which is typically lower than income tax rates for self-employed individuals.
Dividend Tax: Limited companies allow for more flexibility in distributing profits, and dividends may attract lower tax rates compared to income tax rates.
You are only taxed on what you draw down from the company and profit can be left to be later distributed as a capital gain on closure which can benefit from 10% tax via business asset disposal relief.
However, it's important to note that tax considerations are just one aspect to consider when deciding on the business structure. Other factors, such as legal responsibilities, personal liability, administrative requirements, and business goals, should also be taken into account. It is recommended to seek advice from a qualified accountant or tax professional who can assess your specific circumstances and provide tailored guidance on the most tax-efficient structure for your situation.