When to move from Sole Trade to Ltd if mainly FT employed as well?

Anon

I hope someone will know the answer to this question - I was asked but not sure of the answer. If you are full time employed, higher rate tax, and have other self-employed income (currently declared under Self-Assessment), is there a tipping point (amount of profit) where it would be better for tax purposes to change to a Limited Company (or other structure)?

Many thanks

Anon

missk_ensington

I was under the impression the only gain from being a Ltd company was your limited liability if you went bust (i.e they can't take your home regardless of how much debt you get in through your business) But unless your SE trade is something with a lot of credit, i.e builders supplies, a furtinture shop etc I dont think its an issue.

If you're LTd everyone can also see what you're earning by looking you up at companies house, not good if you're a private person!

hermit-crab

missk_ensington wrote:

I was under the impression the only gain from being a Ltd company was your limited liability if you went bust (i.e they can't take your home regardless of how much debt you get in through your business) But unless your SE trade is something with a lot of credit, i.e builders supplies, a furtinture shop etc I dont think its an issue.

If you're LTd everyone can also see what you're earning by looking you up at companies house, not good if you're a private person!

And in your particular case, missk_ensington, not very good if you like to avoid/lie/defraud the inland revenue.

Please look at this persons previous posts before accepting bone fide advice from them.

inmypocketnottheirs

An accountant will be able to give you the exact figures and levels of taxation for a limited company, but I would say if you are paying 40% tax on your PAYE employment and you have other sources of income under self declaration, it would be worth considering incorporating. Corporation tax on the profits your ltd co would pay would most likely be considerably less than you are currently paying. Plus you can pay yourself via dividends further reducing your tax burden. Accounts filed at Companies House, if you are deemed as a small company, would only be abbreviated and not show a great deal of detail. This is not qualified advice, I am sure someone more knowledgeable will be along soon, but worth speaking to an accountant in any case.

funkyBase

I think it depends, how large a scale you business is. I'm assuming because it's a part-time thing it's not really big thing for you.

My opinion it will cost more ie to set up (all the legal docs etc) and you have to employ an accountant to do your books and tax which as a sole trader you could do yourself or get a book-keeper to do so.

I was on a recent finance business course and the impression I got was a ltd company was not the way forward unless you will be taking out huge loans (not personally liable). I wasn't really that concerned and probably didn't listen the way I should have as it's not something I would want to do.

I personally don't think it would save you anything really on tax and you'd just get added hassle. If you know an accountant or have one already ask them, if they are good you'll get the right advice. I think there is a misconception that being ltd you can "fix" it so you pay less tax. That's what a few people on my course thought and the advisor basically said that's not true, or you cannot do it. I wasn't listening as I said, I just got the general info and after that anyone who wanted to be ltd wasn't going to do it anymore.

My opinion, check into it fully before commiting.

Good luck!

missk_ensington

hermitcrab, what the hell are you wittering on about? I wasn't giving advice, I was giving what I think is the difference between Ltd and sole trader, which if Im not mistaken if limited liability, and thats whole point of being Ltd, although correct me if Im wrong!?!?

Chrismaths

Yer mistaken. Yes one difference is limited liability, but as inmypocket has said, they are completely different for tax purposes. A company pays corporation tax (at 19% up to £250k), and then can pay profits out as dividends. A sole trader is liable to income tax.

funkyBase

Yes they are completely different for tax purposes but this does not mean you will end up paying less overall. There are quite a few things to consider, starting up costs, paying your accountant etc (and if it's not going to be a huge turnover maybe not much point). It may be different tax, but you'll have to pay corporation tax at 19% and if you get dividends will you not also have to pay tax on those too?

funkyBase

I got this from a tax website as an example.

It makes my point that while, 19% tax looks great you still have to pay income tax if you pay yourself a salary from the company or if you pay dividends, as that is a form of income.

"Dividends are distributions of company profits. Those profits will suffer corporation tax, with the post-tax profits generally being available for distribution as dividends. Single companies with taxable profits under £300,000 generally pay tax at 19% (for Financial Year 2004). In your hands, the dividends are received net of 10% tax. If you are already a higher rate taxpayer, you are liable to pay 32.5% tax on the gross dividend (i.e. an additional 22.5%). This equates to 25% tax on the net dividend received. Taken together, the tax payable both by the company (e.g. 19% on the profits out of which the dividend is paid) and yourself (25% on the net dividend) gives rise to an overall tax rate of almost 40% (for 2004/05) – 39.25% to be precise."


While some people set up ltd companies to try and dodge tax, it doesn't necessarily work out like that. I think just stating there is a 19% corporation tax to pay is a bit misleading. If you keep your money in the business and don't take it out it will be 19%.

I'm sure people have all kinds of ways to dodge tax but I'm not into that so no information on that from me.

Armadalebill

The best advice is from inmypocketnottheirs. Certainly something to consider if you're earning 60k+ p.a. although it depends on your trade.

You might be able to get more advice from places like your local Business Gateway for example. Any chartered accountant could give you advice on this easily.

You could still do your own bookkeeping, just getting an accountant to prepare Annual Accounts yearly.

Honestly, once you spend a few hours discussing and thinking the issues through, it's not a complex thing to handle. But talk to someone with experience. Like anything with a financial benefit, there's a little investment in time and money to be made in order to legally gain.

inmypocketnottheirs

My advice is, get some proper advice, from a chartered (or certified) accountant. a limited company would cost less than £100 to set up, and accountancy fees from about £600 per year. To quote someone I know, as an IT contractor, working through a limited company, apying himself minimal salary and dividends, pays in a year the amount of tax he would pay in a month on PAYE.

In that light, it is worth getting proper advice from an accountant, any other source (buiness gateway courses, IR courses etc) mean nothing.