Once you have decided to be your own boss, you then need to choose the best structure for your business.
When considering whether to trade individually or through a company, there are many factors to take into account, be it tax implications, legal obligations or the amount of paper work that needs to be filed on a yearly basis – the main concern for most individuals will be the tax that they will have to pay!
There are pros and cons to both options so it is important to think about which will benefit you the most.
Taxation differs when it comes to limited companies and individuals:
- Companies are currently taxed at a rate of 20% – this stays the same no matter what profit is made during the financial year.
- Sole traders, as individuals, have a tax free personal allowance of £11,000 for 2016/17. Once this has been used up they are generally taxed at 20% on any income up to £32,000. They then have to pay higher rate tax of 40% on earnings up to £150,000 – anything above this is taxed at the additional rate of 45%.
- Sole traders also have to pay class 4 National Insurance @ 9% on profits from £8,060 – £43,000 and then 2% on anything above this.
Actual calculations of tax are never simple but overall, trading through a limited company will usually result in the lowest total tax to pay.
When it comes to the administration side of things, sole traders have it a lot simpler. The money they have earned for the year has already been taxed and is in their bank account – that’s the end of it. Companies however, have to file annual returns, submit detailed corporation tax returns and statutory accounts before the various filing deadlines.
Also note that accountancy fees are generally higher for limited companies, which is something to bear in mind!
Overall, many people will choose the limited company option. We are here to help you decide what is right for you, and to guide you once you have started your business.
Please get in touch if you would like to discuss any of this further.