Hi folks, we have a guest post today written by Andy Hyland from AK Tax. As you may know I’ve been making a slow transition into self-employment so when he dropped me a guest post about limited companies vs sole traders I was very interested to read what he had to say! I found the article very useful so if you are thinking of making the jump to self employment, hopefully you will too!


Going Limited: A Sole Trader’s Guide

Two of the most important questions a sole trader can surely ask themselves are “should I go limited?” and “if so, when?” Unfortunately there is no quick or easy answer to either of these questions, as the response is dependent on a whole host of factors specific to you, your industry and your business.

In this article we’ll look at dispelling some of the myths around the of going limited and present a measured assessment of the relative advantages and disadvantages of trading as a limited company.

We’ll begin, by exploring the all-important legal distinction between a sole trader and a limited company.

Legal differentiation

By operating as a sole trader you are your business and your business is you. This might sound like a slightly odd, even obvious, statement but it’s extremely important as it defines your business’s legal status and tax responsibilities. If you are operating as a sole trader and you fail to declare all your earnings for example, then you yourself would personally be liable for paying it all back to HMRC, along with any fines incurred.

Limited companies are different in that they themselves become the legal entity. In the scenario above, it would be the company itself that would be liable for any unpaid tax, along with any fines incurred, and not its directors or owners personally. This has the effect of reducing personal risk (liability) on the individual, or individuals, running the company and their personal assets. Of course if a criminal act were committed such as fraud, these same directors could be personally prosecuted under criminal law.


Tax considerations 

Probably the main consideration for most people when deciding whether to go limited or not, is how much tax they will pay. This isn’t an easy calculation and you’d be well advised to seek the advice of a professional accountant before making any decision. Let’s break down the facts though.

As a sole trader you will be liable to pay both income tax and national insurance contributions on the profits you earn over the relative income thresholds.

  • For 2015/16 the income tax threshold over which you will pay tax is £10,600. After this you will pay tax at the basic rate of 20% up to £31,785 and then at 40% up to £150,000.
  • For National Insurance Class 4 Contributions the threshold is £8,060 and after this you will pay tax at 9% up to £42,385 and then at 2% on anything over this.


Your tax arrangements as the director of your own limited company would be very different. Limited companies pay 20% corporation tax on all profits under £300,000. As of April 1st 2015 this will also be the case for companies earning over £300,000 (unless you earn this through oil extraction or oil rights).

Directors of small companies can choose to take dividend payments from the company’s profits. Dividends don’t pay tax on income up to £31,785 (2015/16 figures), in addition to the personal allowance of £10,600 (£42,385 in total). After that a further 10% tax credit is used to calculate dividend tax paid.

It’s worth noting that in the last budget it was announced that there will be changes to the way dividends are taxed. Business owners taking low salaries and the rest of their earnings as dividends could now face an extra tax bill. This is one of a number of tax crack downs on small businesses, so it’s worth making sure you understand upcoming legislation as well at the current rules.

ITContracting.com have a great dividend tax calculator to help you work it out or visit the HMRC site for more info on corporation tax rates and income tax rates.


Reasons to stay trading as a sole trader

  • Less paperwork: There are a lot more rules and regulations to setting up and running a limited company. Sole traders usually enjoy less paperwork and admin, giving them more time to devote to their clients.
  • Lower accountancy costs: If you run a limited company it is far more likely that you will need to pay an accountant.
  • Easier access to the money you earn: You can withdraw money from the business without recording it as salary, dividend or loan.
  • Less commitment: You can change your mind at any point if you decide to go limited later. It’s also usually a lot simpler to fold up your business and move onto something new, as long as you don’t have any outstanding debts. Winding up a limited company is invariably a lot more complex and expensive.


Reasons to go limited

  • Professional image: In certain industry sectors, potential clients might prefer to do business with limited companies. Going limited could therefore potentially see your market for new clients increase.
  • Protection: As discussed, your personal assets are protected from company debts, meaning that if the business goes under, you won’t be held personally liable.
  • Flexibility: Limited companies are far more flexible as you can create and sell shares in the company. Limited companies can also be sold, meaning you can effectively ‘cash in’ if you’re business has done well and you feel like moving on or want to retire.
  • Naming: Once registered with Companies House (see below) your limited company name is unique and cannot be taken or copied by anyone else.


How do I register?

Your company name must be unique and so it is wise to check with Companies House before settling on a name, only to be disappointed when you find out it already exists. You will then need to register with Companies House to receive a certificate of incorporation and a company number.

To set up a limited company you will need to have the following:

  • A company name (there are rules governing the creation of this)
  • A company address
  • At least one director
  • At least one shareholder
  • An agreement from all shareholders known as a memorandum of association
  • Details of company shares known as a statement of capital
  • Written rules about how the company will be run known as articles of association

Of course there are other options available such as a partnership or Limited Liability Partnership. For more information on these, as well as setting up a limited company, visit HMRC’s website or better yet, call one of their advisers for a chat. Startup Donut also have one of the most comprehensive guides I’ve found online and is a great starting point if you’re still confused.

The information in this article is advice only and you should not act upon it without first seeking professional advice from HMRC, a solicitor, or a qualified accountant.



About the Author: Andy Hyland has been a qualified accountant for fifteen years and is the owner and director of AK Tax, an accountancy and tax advisory firm based in Medway, Kent. He has spent much of his professional career advising small business owners and has written extensively on finance related subjects. You can connect with Andy on Twitter, Facebook and LinkedIn.