Tax is often spouted as a reason to operate under a Ltd company as the small business tax rate is currently 20% of profits, compared with paying income tax and national insurance contributions as a self-employed person.
However, it’s not that simple, because if you’re working through a Ltd company then it’s likely you’ll be a Director of that company and so an employee, which means you need to draw an income from the business. Most do this by paying themselves a minimum wage below the income tax threshold and then paying themselves in share dividends which are taxed differently.
To do all this an accountant should be used to make sure it’s all done correctly but their fees will be higher for doing the tax returns of a Ltd company than they would for a self-employed person. As such it does not normally work out beneficial to be a Ltd company unless your profits are likely to be over £30,000.
Raising Funds For Your Business
Getting funding from a bank to grow your business may be easier as a Ltd company than as a sole trader or self-employed. In theory this should make it easier for the Ltd company to grow its business, perhaps investing in new stock, machinery or advertising campaigns.
This is partly down to Ltd companies being seen as distinct entity in themselves, separate from the Director’s or Business Owners. As such equipment and assets are the property of the company rather than the individual.
As it is a separate entity, if things do go wrong then claims are made against the company rather than the individual. However, with Directorship comes great responsibilities and ultimately they will still be held to account should things go wrong.
Professionalism and Success
Introducing yourself as a Director to a prospective client can add kudos but sometimes the friendly touch offered by working for yourself can win clients over. Much of it depends on who your clients are. If they are big city firms then they may want to deal with a Ltd company but if it’s a neighbour down the road then they may prefer to work with a sole trader.
When it comes to retirement it is far easier for a Director/Shareholder of a Ltd company to sell their stake in the business than it is offload a non-registered company. On this topic a Ltd company has to pay to register their name with Companies House, but once done it means no one else can use the name, which protects the brand identity.
In this year’s budget The Chancellor made some announcements that might also impact on your decision.
- Corporation tax to be cut from 20% to 17% by 2020 – which is a plus for Ltd companies.
- Class 2 NI to be abolished for sole traders from April 2018 – a positive for self-employed.
- Small business rates relief to be raised to £15,000 and the higher threshold to £51,000 – which is good news for Ltd companies.
- Contractors working in the public sector will be prevented from using “personal service companies” to cut their tax bill – so some rethink might be needed there if that is the market you operate in.
On top of this there is also the change to how dividends are taxed which was announced last year and comes into force from this April and include the following changes. This is important for those operating as a Ltd company as many used to draw their income in the form of a tax dividend.
- 10% tax credit on dividends will be abolished.
- A £5,000 tax free dividend allowance will be introduced.
- Dividends above this level will be taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate).
In conclusion, the choice to operate as a self-employed professional or a Ltd company comes down to the type of business you run, your clients, your profit and what your plans are for the company. It would be our recommendation to start off self-employed as that is the easiest and cheapest way to operate in the short term, but you can always move to a Ltd company at a later date should your business grow.
Please note that although Fast Invoice writers have done the research before giving you the information, we recommend you consult your accountant, or financial advisers before making any decisions based on this article.