Sole Trade -v- Limited Company

My partner and I currently work through our LTD Company. But we don’t earn/generate that much income so I’m wondering if we would be better off switching to regular self-employed?

The main deciding factor I think would be the expenses that can be claimed.

Can anyone tell me if these expenses (that we claim now) can be claimed when working self-employed from home (and occasionally at a co working space):

• Portion of house rent when working from home (Use of residence as office)?
• Co working space (a place where we pay to work from – would this affect the above)?
• Web hosting (for our business website)?
• Computer software (web design stuff and accounting software)?
• Computer hardware (might have to buy a new laptop in the next year or two)?
• Accountancy fees (what we pay the accountant for doing the tax stuff)?
• Foreign exchange losses AKA Realized Currency Exchange Gain/Loss (we get paid in USD and PayPal uses a lower exchange rate so we lose about a thousand GBP a year due to this)?
• Bank/Finance Charges (PayPal fees on each client payment we receive)?
• Subcontractor Costs (sometimes we have to hire people to do some of the work we take on)?
• Home broadband connection (not sure if we claim that or not)?

I think that’s about all of our expenses. We haven’t started a pension yet. But if we did start a SIPP, would that be an expense too?

Also the cost of the accountant could be a factor too, depending on the difference between the cost of them doing the books for a LTD company vs. two people’s self-employed tax returns.

Does anyone have a rough idea of how much an account charges for doing one person’s tax return? We log everything through FreeAgent so I think all the data would be there?

It’s hard to say which is best because our income should go up each year, but it might not!

Also, what’s the process for shutting down a LTD Company? Does it have a cost? Can we leave it inactive and come back to it later when our earnings pick up?

Are there any good spreadsheets around that I can put all the details in and see what they say?

I will ask our accountants but I’d like to get an idea myself first, as I assume it’s in the their best interests to keep me as LTD Company as they make more money from us that way!

Many thanks!

 

Why do you think you would generate more income self employed than as part of your own ltd company? What do you think would drive such a change?

 

Are you referring to this bit:

If so, I meant that I hope we will be earning more next year and the one after, as we raise our rates, get more clients etc.

If that happens, then it would make more financial sense to use a LTD company if we are doing £75k instead of £30k.

It is my understanding that the more money you are generating the more sense to use a LTD company vs sole trader due to tax savings. Is that not right?

Thanks

 

No, I meant this bit

 

Ah right.

I was assuming that if you don't earn much, its better to work as a self employed sole trader as you pay less tax. Where as if you are earning more, it becomes tax efficient to use a LTD company.

But running some rough numbers, it seems like the LTD is almost always better?

For example, this surprised me:

LTD Company Scenario:

If we were generating £50,000, then we would each get a salary of £8,160 then pay 19 percent corporation tax on the left overs (19 percent of £33,680 is £6,399 in tax). Then dividend tax on the remaining £43,601 (43,601 / 2 = 21,800 then dividend tax would be 1,208 for each of us so £2,416 for both of us.

So corporation tax of £6,399 + 2 dividend tax of £2,416 is £8,815

Sole Trader Scenario:

Where as if we were self employed, we'd get £25,000 each and pay £4,619 tax and NI each or £9,238 in total.

LTD Company scenario pays £423 less tax!

Hmm. Seems like its always better to be working through a LTD company then?

I guess the accountants fees could make the difference? £1,000 roughly for a LTD company vs, whatever is charged to do two personal tax returns? Although I think we also pay the accountant to submit our personal tax returns in addition to doing the company returns. Does that sound normal? So we might be paying for both already!

 

You can't caim against tax for an accountantt doing your personal tax return - that isn't a business expense, that's a personal expense. You can charge against tax for the accountant doing the work on your sole trader accounts to produce the figures that go on your personal tax return for self employment - subtle difference.

 

Too subtle for most accountants who usually just charge one fee, all of which miraculously appears in the sole trader accounts

For limited companies a notional figure for the directors' returns frequently goes on their P11D forms with the company paying the fee

 

Forgive me - but surely the best person to advise would be your existing accountant - ask them the question and they have all the details to do the comparison accurately.

 

I dont agree that the main deciding factor should be the expenses that can be claimed.

As you've got an accountant already ask them to tell you how much tax you would have paid/will pay trading as a sole trader/partnership in comparison to the company. Then compare that taking into account the admin costs ie accountancy fees etc.

 

Thanks. Will speak to them when I can.

Before I do, let me ask just one more little question about expenses against tax due.

Say the company had £100,000 of profit before tax and therefore owes £19,000 in corporate tax.

Say if the company needed a new computer, and they bought one for £1,000.

Would the company now owe £18,810 in corporate tax (19 percent of £99,000)?

So the laptop really cost £810 (the difference between the profit of £81,000 (no laptop) and £80,190 (laptop)?

Thanks

 

If the company choose to claim the full amount as AIA then yes.

 

When your income goes over basic rate you should seriously consider going Limited. Your tax savings will be much greater than the extra accounting fees and companies House filings.

You will only pay 19% corporation tax in 2019 and this is further going down to 18%. This can also be greatly reduced by running a payroll for around 8k which will reduce your corporation tax by further 1.5k.

Even with all the changes to dividends over the last couple of years, it is still the most tax efficient way of drawing money from business

One of the bigger reasons to go Limited I think is retutation. Your customers may perceive your company as more professional if it is a limited company. At the end of the day it is all about perception.



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Your suggestion to pay an £8k salary may save Corporation tax of £1,520, but, it'll cost at least £3,200 in Income tax for a higher rate tax payer.

I hope you've not suggested that to too many of your clients.

 

That is WAY down my list when I'm looking at incorporating a clients business.

 

Was talking from the client perspective

 

If the money is going through the limited company he is no longer higher rate tax payer. His salary is 8k plus dividends that are declared

 

I'm glad you added that

 

Thanks for the clarification but you did state (my underline)

''One of the bigger reasons to go Limited I think is retutation.''

As mentioned that would be way down my list.

 

Thanks so much for a very helpful summary of this query.

 

Hey there! There are many advantages to running a Limited company compared to being self employed, some of which are listed below, so you may want to consider these before changing your business structure to being self employed.


a) A ltd company will provide added confidence to external stakeholders such as suppliers and customers

b) A ltd company’s profits will be subject to corporation tax rate which is much lower than personal income tax rates. A ltd company will pay corporation tax on it’s profits( which is currently 19%) compared to income tax rates which can be as high as 45% depending on how much you earn.

c) The director’s liability is limited only to the value of its assets, so if the company was to go bankrupt, the director’s personal assets are not at risk of possession.

d) The shares in the LTD company can be used to further expand the business.

e) Limited companies offer better tax planning opportunities – for example every penny you earn in a tax year as a sole trader will be taxed that year, however with a limited company you can store money in your company and take in future years or use that money to invest in the business.

f) It might be easier to obtain a bank loan


If you are self employed(trading as a sole trader), you can claim any expenses that are incurred wholly and exclusively for the purposes of conducting your business,so most of the expenses that you are currently claiming, you should be able to claim if you were self employed as well. The gov uk has very handy section on which expenses you can and can’t claim when you are self employed.(It’s called “Expenses if you are self employed”).


If you currently use your house as an office, you can also claim the portion of the rent and utilities that is used for your business. For example if you use half the rooms in your house for business, you can claim half the rent and utilities as your business expense.



If you were to start paying into a personal pension and you were self employed, you will not be able to directly offset your pension contributions against your trading income from your business, but you will be able to get tax relief of your total annual income at your highest rate of income tax. However if you were to pay your pension contributions from your LTD company, you will be able to claim this as your company expense which in effect will reduce your taxable profit and hence reduce the corporation tax that you would pay.


To close down a LTD company, you can apply for what’s called a voluntary strike off which costs £10. If the company has stopped trading, you can also make the company dormant and restart it again at a future date if it starts trading again. All of these processes explained in detail on the gov uk website,


Administering a LTD company is more work( Corporation tax returns have to be filed, company accounts have to be made and filed, confirmation statements have to be done with companies house), so your accountant is likely to charge you more for this than doing two self assessment tax returns. The fees an accountant will charge for doing a tax return will vary depending on how complicated or simple your other tax affairs are, so its difficult to quote an estimated price.