Sole Trader or LTD

[Nlhill1990]

Hi,

I have recently started an online business as a side hustle where recent sales indicate profit of between £10-£15k a year.

I am a higher rate tax payer earning around £62k. My plan for the side hustle would be to extract/use all the income so no plans to pay into a pension (as already do so with employer) or to keep cash in the business.

My questions are:

1. On the basis of current projections, is it more tax efficient for me to stay as a sole trader or set up a limited company?

2. If the answer to 1 is to stay as a sole trader, at what level of profit would it be worth considering ltd company?

Any information helpful. Thanks in advance

 

[Baines Watson]

Hi,

I have recently started an online business as a side hustle where recent sales indicate profit of between £10-£15k a year.

I am a higher rate tax payer earning around £62k. My plan for the side hustle would be to extract/use all the income so no plans to pay into a pension (as already do so with employer) or to keep cash in the business.

My questions are:

1. On the basis of current projections, is it more tax efficient for me to stay as a sole trader or set up a limited company?

2. If the answer to 1 is to stay as a sole trader, at what level of profit would it be worth considering ltd company?

Any information helpful. Thanks in advance

Hi,

Great to hear about the success of your side hustle! I can see why you'd want to understand the best tax-efficient approach, especially given your existing income and plans to extract all profits.

Just a quick comparison of the two scenarios based on the £10k - £15k profit indicates not much of a difference, in fact the Ltd Company option may be a bit more expensive if you extract all the profits:

Summary of tax comparison:

• For £10,000 profit:
  • Sole trader: £4,200 tax and NIC
  • Limited company: £4,296 tax
• For £15,000 profit:
  • Sole trader: £6,200 tax and NIC
  • Limited company: £6,613 tax

As a limited company, you do gain the benefit of limited liability, but you’ll also have added administrative costs, such as filing fees and accountant fees.

If your profits increase, the tax efficiency of a limited company becomes more apparent due to the flexibility of dividends. Typically, once profits exceed around £30,000 to £40,000, the benefits of being a limited company become clearer. With higher profits, the ability to pay yourself a combination of salary and dividends can result in more significant tax savings.

At your current profit levels (£10k-£15k), it may be simpler and more cost-effective to remain a sole trader, but you should reassess this as your side hustle grows. Engaging an accountant to review your financial projections will also help optimize your tax strategy.

Hope this helps, and feel free to ask any further questions!

 

[Nlhill1990]

Thank you so much, that is a very detailed response and very helpful!

 

[DontAsk]

If you have a partner, can you legitimately employ them in the Ltd? Paying them a wage as to use their tax allowances and reduce profit might be a solution. Also consider dividends if they were to be a shareholder.

Will the business grow? If so I would talk to an accountant and plan for the future now.