Sole Trade -v- Limited Company

Discussion in 'Accounts & Finance' started by DFL, Mar 13, 2008.

  1. DFL

    DFL UKBF Newcomer Free Member

    1,026 334
    There has been a wealth of posts on this subject, some giving excellent advice and some giving not so good advice.

    I am not sure what mine falls under but will give you my thoughts.

    First things first, consider the IR35 question before moving on.

    Once satisfied, tax considerations.

    Currently, on annual net profits of £50,000, the company option will save you up to £3437 per year in tax. (I am working on the basis of personal allowance salary balance dividends)

    Differential pension treatment between that of a company and as a sole trade or partnership will also benefit you.

    So in tax terms it first appears to be a no brainer.

    Unfortunately there is a lot more to consider.

    If you go limited then your accountants fees will most likely rise by iro £1,000 compared to a non incorporated trade. This will reduce the tax gain.

    If you run a car through the business then depending on the car you drive this will also have a significant impact on your tax bill. An older car would mmost likely be more attractive through a limited co - a gas guzzling 4x4 would be much more beneficial running through a sole trade or Partnership.

    Tax credits can be adversely affected by your choice due to dividends being grossed up - so exactly the same actual income would be treated differently for tax credits and affect the amount received.

    Corporation tax rates / income tax rates - The former is rising, the latter is falling.

    This government has moved the goalposts with regard to taxation of small companies more in the last five years than in living memory - who knows what is next? Income shifting will be in in some shape or form in one year, and don't rule out NI on dividends for close companies (once the election is out of the way, of course)

    And once you have incorporated and got all of the reliefs then you won't get any more, or find it as easy, to go back the other way should the above come to fruition.

    Then there is all the other stuff that is always bought up:

    Limitation of liability - How important is that to the business?
    Perception - How important is that to the business?
    Administration - How good are you at it?
    Directors Duties - More onerous than that of a sole trader
    Loss relief - Important consideration
    Associated companies - If so could increase the company tax rate.
    Profit extraction - In particular dividend paperwork must now be watertight and can only come from profit.
    Critical illness cover - Los salary / high dividend, are dividends taken into account by your insurers? If not could be a nasty surprise when you most need the cash.

    The trouble is that a lot of advice given is to go limited due to the immediately apparent tax advantages of low salary / high dividend, and people are quick to take it up due to them naturally wanting to retain more of their hard earned profit. Yet many of the above points are not always considered and they need to be.

    Don't get me wrong - my opinion is that the limited company route remains an attractive solution to many, but those who decide to go into it should do so with their eyes open and aware of the full facts. And what suits one doesn't always suit another - there is no standard answer without knowing the full facts of someones business, and even their personal traits.

    Don't make this decision lightly.
    Posted: Mar 13, 2008 By: DFL Member since: Aug 21, 2007
    • Thanks Thanks x 112
    • Useful Useful x 2
    • List
  2. KM-Tiger

    KM-Tiger UKBF Legend Full Member - Verified Business

    10,077 2,719
    Thank you for a very useful summary of this question.

    Mods: Please can this be stickied? The question does get asked a lot, and as DFL points out, there is never a quick and easy answer.
    Posted: Mar 14, 2008 By: KM-Tiger Member since: Aug 10, 2003
  3. MikeH

    MikeH UKBF Enthusiast Free Member

    594 58
    An excellent overview that should reduce the number of repetitive posts on the subject. I am sure there will still be plenty of additional questions but hopefully they will be targeted to a specific issue raised by this thread rather than general questions.

    Posted: Mar 14, 2008 By: MikeH Member since: Aug 12, 2004
  4. elainec100@cheapaccounting

    [email protected] UKBF Newcomer Full Member

    13,267 2,882
    Posted: Mar 16, 2008 By: [email protected] Member since: Nov 4, 2005
    • Thanks Thanks x 19
    • Useful Useful x 1
    • List
  5. tax-sorted

    tax-sorted UKBF Newcomer Free Member

    83 17
    And always seek professional advice before making a decision.

    It amazes me how many people just "do it" and incorporate without any idea of the repurcussions! I agree with all that has been said above but would like to add - PLEASE SEEK PROFESSIONAL ADVICE BEFORE DOING THIS!

    I don't write my own will, perform my own surgery, do my own conveyancing or repair my own central heating boiler. I pay an expert. And if we all did that then we would all earn money for doing what we do best:)

    In the long run the money you pay out for good advice should far outweigh the benefit.
    Posted: Mar 20, 2008 By: tax-sorted Member since: Jun 25, 2007
  6. derren

    derren UKBF Newcomer Free Member

    133 15
    This is great advice. I am regularly asked by clients what to do, with the most common question/statement is "jim down the pub says i should be ltd because I will pay less tax so I want to go ltd".

    I also have another friend who went ltd but now is regretting it and he can not work out why he went ltd now he has realised its not so good for his situation. He was another one who went with "jim - in the pub" advice. Might go down the pub and find "jim" and give him a kicking.

    Also fees to companies house don't forget for annual returns etc.


    Last edited by a moderator: Mar 14, 2012
    Posted: Mar 20, 2008 By: derren Member since: Aug 21, 2007
    • Thanks Thanks x 2
    • Useful Useful x 1
    • List
  7. lizzyllu

    lizzyllu UKBF Newcomer Free Member

    3 1
    Are there any other options other than umbrellas or going ltd?

    I have been combing the forums and websites but no one really saying if there is ir isnt?
    Posted: Mar 27, 2008 By: lizzyllu Member since: Mar 27, 2008
  8. tax-sorted

    tax-sorted UKBF Newcomer Free Member

    83 17
    It depends! To answer your question an accountant or advisor would need to know a lot more about your business, your business plan, profit expectations, how much money you need to live and on......................................
    there is no easy answer and if you get it wrong it can be very costly.
    go to my website and download some information for free about how to trade
    Posted: Mar 27, 2008 By: tax-sorted Member since: Jun 25, 2007
  9. VickyShaw

    VickyShaw UKBF Newcomer Free Member

    35 8
    This is a very good post on the subject of the difference between limited companies and sole traders. Does the savings calculation relate to the 2007/08 or 2008/09 financial year? If the former, then could someone update the amounts so that they relate to the new tax year figures and thereby keep the sticky current?

    Posted: Apr 18, 2008 By: VickyShaw Member since: Jan 15, 2008
  10. tax-sorted

    tax-sorted UKBF Newcomer Free Member

    83 17
    Thats a very dangerous statement mortgage broker! On what figures are you basing your assumptions? It depends on the profit, how much money you want to take from the company, what are your long term plans and much more.

    You should NOT base a decison how to trade purely on tax reasons. An old saying "don't let the tax tail wag the dog" springs to mind!

    I have seen so many people do this for the wrong tax reasons and regret it. My message is the same - always seek professional advice BEFORE deciding how to trade.
    Posted: Apr 19, 2008 By: tax-sorted Member since: Jun 25, 2007
  11. tax-sorted

    tax-sorted UKBF Newcomer Free Member

    83 17
    It looks like mortgage broker withdrew their last post so it makes mine look a bit confusing! WHat mortgage broker said was "Its better from a taxation point of view to go down the LTD Company route" A very dangerous statement from someone not qualified to give that sort of advice! Stick to what you are good at my friend;)
    Posted: Apr 19, 2008 By: tax-sorted Member since: Jun 25, 2007
  12. elainec100@cheapaccounting

    [email protected] UKBF Newcomer Full Member

    13,267 2,882
    This seems to come up time and again so added here:

    When you register as an employer a free CD ROM is sent out and you receive automatic updates for budget changes etc. The CD ROM covers payroll, end of year forms etc

    And go can get a free course on it, see here:
    Posted: Apr 30, 2008 By: [email protected] Member since: Nov 4, 2005
    • Thanks Thanks x 1
    • Useful Useful x 1
    • List
  13. Haydn1971

    Haydn1971 UKBF Newcomer Free Member

    27 2
    Now this has me half worried - When I was working through my previous contract incarnation I used to recieve a weekly pay slip indicating pay, expences and dividend payments - Now as far as I'm aware I don't have to give myself a payslip, but should I be breaking down the payments made to me each week as a payslip (showing dividends) or is it simply enough to have this as a spreadsheet column covering each week of the year ?

    i.e. how often do I legally need to issue a dividend voucher ?

    P.S. Thanks for the heads up in the other thread about his thread ;)
    Posted: May 7, 2008 By: Haydn1971 Member since: Sep 10, 2007
  14. elainec100@cheapaccounting

    [email protected] UKBF Newcomer Full Member

    13,267 2,882
    Haydn - that shows liked a MSC which have now been outlawed!
    Posted: May 8, 2008 By: [email protected] Member since: Nov 4, 2005
  15. Mark Lee

    Mark Lee UKBF Newcomer Free Member

    17 4
    Great advice here but the savings quoted above are way out of date now as recent tax changes have significantly reduced the headline potential tax savings - that are not available across the board anyway as is clear in the rest of the first post above.

    I'd add the following by way of background to help clarify things:

    It is all too easy to make simplistic comparisons of the comparative tax burdens on an unincorporated business and an incorporated one. There are other tax and commercial issues to consider too.

    There are a range of commercially available spreadsheet style programmes to assist the process, but they invariably require the user to make various assumptions. Nevertheless these programmes can be useful tools to demonstrate the potential tax savings that may follow from incorporation, or indeed now, from disincorporation. If you're interested in obtaining one of the best such programmes drop me a note and I'll let you have the details.

    In practice the real difference in comparable tax burdens year on year will depend upon a range of issues, not all of which are catered for in typical spreadsheet programmes:

    • the relative level of salary and dividends to be paid by the company and any restriction on the potential timing or level of dividends;
    • the timing of dividend payments and the impact of these on annual income as regards entitlement to tax credits;
    • the level of non-deductible business related expenditure, eg: entertaining;
    • business use vs personal use of car or van and whether this is to be owned personally or by the company;
    • timing of incorporation and impact on self assessment tax payments re the final period of pre-incorporation trading;
    • the extent to which profits will be retained in the company to fund capital expenditure and expansion;
    • the extent to which post-corporation tax profits will be used to fund loan repayments rather than dividends.

    It's also important to be aware that companies pay corporation tax on their profits. The taxable profits of a company are identified after deducting all salary payments including those paid or payable to the owner. Dividends however are not deducted. Company law requires that dividends are paid out of a company's reserves which means what's left after the corporation tax has been charged on the profits. Salaries are subject to tax and NICs at upto 41%. Dividends are only subject to income tax if the shareholders taxable income makes them liable to higher rate tax. In such cases 25% tax is payable on the amount of dividend received by the shareholder.

    The level of corporation tax depends upon the level of profits (and the existence of any associated companies). Where one person only owns one company for instance, corporation tax is now payable at 21% on profits upto £300,000.
    Posted: May 9, 2008 By: Mark Lee Member since: Jan 16, 2008
  16. mahutchinson

    mahutchinson UKBF Newcomer Free Member

    1,058 110
    I would say that the directors' duties (now codified in CA 2006) are mostly theoretical and common sense stuff which a sole trader should also follow, apart from recording board minutes.
    Posted: May 13, 2008 By: mahutchinson Member since: Mar 17, 2008
  17. limes_04

    limes_04 UKBF Newcomer Free Member

    9 2
    This is very informative post between Sole Trade and Limited Company:).
    Posted: May 28, 2008 By: limes_04 Member since: May 28, 2008
  18. Alexa42

    Alexa42 UKBF Newcomer Free Member

    18 12
    There is a lot to take into consideration when doing these calculations. You could end up making a detrimental mistake.
    Posted: Jun 3, 2008 By: Alexa42 Member since: Jun 3, 2008
  19. Alexa42

    Alexa42 UKBF Newcomer Free Member

    18 12
    I agree with tax-sorted he knows what he is talking about! Good overview too.
    Posted: Jun 3, 2008 By: Alexa42 Member since: Jun 3, 2008
  20. Jezclayton

    Jezclayton UKBF Newcomer Free Member

    535 67
    For someone who has had a limited company for a number of years and never taken a dividend payment (long story) this thread has been a minefield of useful information. Whilst a completely different industry sector to my own, the link to Contractor Calculator was particularly useful.

    There were however a couple of areas that I didn't immediately grasp, probably due to them being taken for granted by more experienced individuals:-
    1. What format and content should the minutes of a dividend declaration take?
    2. What is a tax voucher and where do you get one from? I initially assumed this was a prescribed form and not in effect a letter.
    I eventually found answers to both of the above in the Contractor Calculator pages

    The other confusing area was over the tax credit. I understood that a shareholder may receive say a net dividend of £9,000, a tax voucher for £1,000 and thus a gross declarable dividend of £10,000. What I wasn't so sure of was the treatment within the Company accounts. Would reserves be reduced by £10,000, with corresponding entries of £9,000 paid to shareholders and £1,000 payable to HMRC, or are reserves just reduced by £9,000, the tax voucher being notional only? My current understanding is that it is the latter. Could someone please confirm this?

    Finally, with the 10% personal tax rate now abolished, does this have an impact on the amount of future dividend vouchers or are they totally unrelated?
    Posted: Jun 13, 2008 By: Jezclayton Member since: Mar 2, 2008