Sole trader versus ltd company

Chinkle

I'm just setting up on my own and want to figure out what would be the most tax efficient way to go either sole trader or ltd company

Does anyone point me in the direction of some kind of comparison tool or spreadsheet where I can enter various income projections and work out what taxes/NI etc would be due for the two types of set up.

I know there are other things to consider too, is there one website you'd recommend to help me steer through it all. I want to be armed with information before I consult an accountant.

PlutoinCapricorn

www.businesslink.gov.uk may be able to help.

It is not just a question of tax. Are you planning to employ anyone? Will you be investing a lot of money in the business or could there in theory be debts? Will you need to be signing contracts for office space etc? What trade, profession or work will you be doing? Will you be selling via a website?

The standard advice is to start small as a sole trader, build up the business then incorporate if and when the income reaches a certain level, unless there is a good reason for having a company right from the start. Have you got a job that uses up your personal allowance?

Nosht

Remember that its easier to "steal" from your business as a sole trader rather than being a limited company.


Regards,


N.

James_Trimby

business link site is a good one for basics but can be a bit simple for a final decision but a good read before visiting an accountant. Please dont underestimate the hassle of running a limited company. Formation costs/new tax ref's etc differing accounting requirements/new bank accounts/multitue of ways for taxman to end up checking you out etc etc. IF a business that is going to run from start you do need to consider this IF a potential business maybe worth running as "soletrader" till sign of trade starting etc then if necessary can dump into a company as pre incorporation expenditure which at least saves set up costs and hassle until you kow you need it.

Very difficult to give much more advice as normally takes a couple of hours meeting to discuss ! NOT always the right answer but look at your competitiors if most are limited then there is a hint that is the way to go.
Finally re tax savings this is dependant on lots of things a simple dividend/sole trader spreadsheet does not cover motor costs/use of home as office/etc which can also effect the decision.
If comparing simply at £15k profit all withdrawn no other income, ltd co saving is £622 for 2009/10 £25k saving is £1322 for £50k saving is £3706 for £100k £3831 and for £400k you would lose £1500 ! BUT if a lot of assets needed and loans to repay you are retaining for a while and companies tend to have an advantage there. FOR motor etc I normally allow about £1000 extra costs for company for average business use (very rough rule of thumb) so for £25k or less expected profit only incorporate of other reasons NOT tax.
Hope this helps rather than confuses!

dunstonh

dont forget state pensions. Self employed only qualified for the basic. Not the state second pension. With the limited company you would qualify, subject to earnings.

A typical second state pension income is around the same as having around £100k-£150 in a personal pension. For a 38 year old thats about £128pm pension contribution indexed annually.

Chinkle

Thanks for the replies so far, I do realise there's lots of other considerations, but this to me is a fairly simple set up, so let me explain a little more. I'm a freelance writer, mostly working from home, very little set up costs (PC, internet connection, printer), no motor, equipment or stock to buy.

Nosht - explain please not that I want to be "stealing" but want to ensure I offset what business expenses are reasonable.

Dustonh - will take into a/c state pension difference, but already have personal pension in place too.

JamesTrimby - can you explain how you arrived at your figures you quoted, this is the kind of thing I am looking for

PlutoinCapricorn

Chinkle, I am similar to you in that I am a home based researcher: I am a sole trader because I can't see any advantages in having a company.

I am not buying and selling; I have no intention of employing anyone; I am not renting office space; my expenses are modest and there is not much need to separate personal and business affairs. A sole trader is the business. I do not need to pay an accountant to look after my financial affairs; no one can look me up at Companies House ... and I am not earning enough to make incorporating advisable.

James_Trimby

HI Chinkle used a spreadsheet I pay for each year, many accountants will have similar (I normally forget I have them as part of a package!) the figures are based on taking out £6k in salary to use personal allowance plus rest dividends.

Nosht comment is probably down to fact rules on companies are many are from differning angles. For sole trader there is one rule and easier to meet the terms. (and less chance of multi penalties/tax if you get it wrong). As an eg it is easier to get tax relief some of your household costs (as working from home) as a sole trader (You can as a limited company but you need a rental agreement and need to do your own rental accounts etc ) How you buy a asset or cost is easier as well as dont have to worry so much about getting the invoice names right etc
Re second state penison you would only get this via a company if you took all the monies as a wage incurring large NIC bills. If you had a company on £25k pa for this tax year it would cost you an extra £3286 to take out via a salary rather than dividend. Therefore probably better off paying a bit of this saving into your own penison/savings (speak to IFA )before paying rest as a dividend BUT this is IFA territory so take with pinch of salt!

I think you should be able to find a few internet based comparison sites out there (I'd google "dividend v salary" and spend an hour investigating!) but hopefully I've given you a good idea of the range of savings and the problem of taking these savings at face value

PlutoinCapricorn

As I have never had a company, I am not sure how you get money out. It is not as simple as it would be for a sole trader

I know that you can be a director and pay yourself a salary, which means that you need to deduct income tax and NI, unless you deliberately pay below the personal allowance. Fine if you are happy to keep the money locked inside the company. You can also take money as dividends I believe.

All this sounds too much like hard work to me.

Have you got any idea of how much you will be earning?

dunstonh

PlutoinCapricorn wrote: »

Chinkle, I am similar to you in that I am a home based researcher: I am a sole trader because I can't see any advantages in having a company.

I am not buying and selling; I have no intention of employing anyone; I am not renting office space; my expenses are modest and there is not much need to separate personal and business affairs. A sole trader is the business. I do not need to pay an accountant to look after my financial affairs; no one can look me up at Companies House ... and I am not earning enough to make incorporating advisable.

Thats fine and not an uncommon situation. However, is the amount you are saving more than the lost state pensions you wont get?

In other words will you pension fund be around £150,000 higher than what you should normally be paying to make up the lost state pension income?

Pennywise

James_Trimby wrote: »

Re second state penison you would only get this via a company if you took all the monies as a wage incurring large NIC bills.

No, you qualify for this as long as your directors fees (payroll) is over the NIC threshold which at the moment works out at around £475 per month, on which there is no tax nor national insurance, so you get your state second pension for nothing. Also worth noting is that even though your "wages" are only £5,700 per year, your state second pension accruals are credited to your "account" at a wage of around £10,000 - this is a incentive to low earners but works just the same for a company director earning £5,700. So basically you get the state second pension based on contributions made from someone earning £10k per year even though you aren't making any contributions. If you're going to be a director earning that kind of small wage for many years, say 10-20 years, then you'll be quids in by using a limited company as opposed to the pittance of the basic state pension you'd get if you were self employed.

Also, think about the better benefits of sick pay, maternity and paternity pay, by being a director of your own limited company as opposed to the very limited comparable state benefits if you're self employed.

All in all, tax is a very small part of the decision making process. State benefits, limited liability, etc are just as important. A good accountant will be able to work through all this for you, along with consideration of company car or not, other benefits, use of home claims, etc., and make the decision a lot easier for you.