Sole Trader vs Limited company

PaulJ123

Hi,

Looking to go self-employed and wondering about the differences between a sole trader and a limited company.

I plan to employ an accountant but would like to try and understand the process better first.

I have interested clients that would employ me as a consultant on special projects.

I expect to earn around £100,000 a year (maybe not at the start but in a year or 2 I should be on this) - is the following correct?

Sole trader option:
Income £100,000
Expenses: -10000
Personal Allowance -8105
Remainder 81895
Tax at basic rate - 34370 at 20% = 6874
Tax at higher rate - 47525 at 40% = 19010

National Insurance class 4:
Sole trader option:
Income 100000
Expenses -10000
NI Limit -7605
Remainder 82395
Tax at basic rate - 34370 at 9% = 3138
Tax at higher rate - 47525 at 2% = 951

Class 2 NI: £2.65*52 = 137.8

Total taxes to pay: 30110.8

(Is class 4 paid on accounting profit or tax profits?

i.e. if turnover is 100,000 and allowable tax expenses are 10K and disallowable expenses are 5K would class 4 NI be payable on 90K or 85K?)

Limited company:

Turnover 100000
Expenses: -10000
Salary: -7605
Taxable profits: 82395
Corp tax x 20%: 16479
Profits: 65916
Dividends -61383
Retained cash 4533

Individual director:
Salary of 7605 (at the NI lower limit so no NI and below the personal allowance so no income tax)
Gross dividends: 34,870 (no tax - net amount of 31383 to be paid by ltd company)
Band used 42475
Gross dividends: 33333 (taxed at 32.5%-10% credit - net amount of 30000 to be paid by ltd company)
Tax payable 33333 x 22.5% giving 7500 personal tax

Total taxes: CT 16479 + IT 7500 = 23979

Tax saving of 6131.8

I know my calculations are very basic but am I thinking along the right lines or have I made errors?

Edit: IR35 not sure about this but I know people in similar roles doing a limited company route and they seem to be ok?

HappyMJ

Almost all companies are reluctant to deal with sole traders as the relationship may not appear to be a genuine self employment relationship to the HMRC especially for what is essentially considered just labour as a consultant and also being a long term contract rather than just a few days here and there. If you set up a limited company then the relationship between the 2 companies eliminates the risk of the client potentially being liable for employers national insurance payments on the payments made to you as your company would be responsible for them.

edit: answering your edit Edit: IR35 not sure about this but I know people in similar roles doing a limited company route and they seem to be ok?

IR35 is about how you/or the HMRC calculate how much tax is due. If the job you are doing is the same as someone who is directly employed then you have to pay tax on the income similar to someone who is employed and can't take advantage of lower taxed dividends. However, you can ensure a contract is IR35 compliant by ensuring you can choose the hours you wish to work, can replace or get help of another person (with the approval of the client), and will fix mistakes in your work at your own expense...etc...etc...

cb4fwh

If you going to be turning over 100k, limited company is the only way to go. I do the same, pay myself upto the higher rate tax limit & leave the remainder in the business to pay yourself when you are out of work.

Approach any of the big accountants e.g. Brookson for a detailed breakdown. There's no obligation...

martinsurrey

you're on the right lines but your calcs are set out in a confusing manner

I'll take the tax on the Ltd from the dividend line.
...
Dividends -61383
...
Grossed up (for tax credit) divided received = £68,203 (61,383 cash + £6,820 tax credit)
Less person allowance (£8,105)
Add salary taken £7,605
Taxable dividend income £67,703
Basic rate (first £34,370) @ 10% = £3,437
Higher rate (remaining £33,333 @ 32.5%) = £10,833
Total tax = £14,270
Less dividend tax credit = (£6,820)
Tax due = £7,450

if you are working for several different companies at the same time, and its all project related (seperate contract for each) then you will be more than likely accepted by HMRC as self employed (but to be sure ask them, or pay someone to ask them).

you WILL be better off under a Ltd company if you get upto £100k income, but dont forget the admistration costs (accounts, tax returns, annual returns etc)