Sole Trader or Ltd company

longwalks1

As per my other thread about a business bank account, I am thinking of working part time for myself (I’m currently a 40% tax payer) on my days off.

The line of work I’m considering going into I’ve been told am more likely to get work if I’m seen as a Limited company, as opposed to a sole trader. So after some advice please?

It will only ever be me working for myself, want to do everything right, register with Companies House etc, so do I work as a sole trader or register as Ltd company?

My previous thread about a bank account I estimated a turn over of £5k p.a., but I’m going for further training so will possibly be turning over £10k to £15k a year instead

Any advice greatly appreciated. I really want to make a go of this

00ec25

britishboy wrote: »

so do I work as a sole trader or register as Ltd company?

depends what you do

yes there are many companies in certain sectors who will only employed Limited Companies because of the risks to them of being held to be using "disguised employees" (aka false self employment)

for 15k a year turnover for a higher rate taxpayer the savings from operating a company would be negligible, even if you achieve 12- 14k per year clear profit.

PS - if this is with reference to your PAT (testing) work, then forget it. Be a sole trader.

longwalks1

00ec25 wrote: »

depends what you do

yes there are many companies in certain sectors who will only employed Limited Companies because of the risks to them of being held to be using "disguised employees" (aka false self employment)

for 15k a year turnover for a higher rate taxpayer the savings from operating a company would be negligible, even if you achieve 12- 14k per year clear profit.

PS - if this is with reference to your PAT (testing) work, then forget it. Be a sole trader.

Hi 00ec25
I'm thinking of going down the testing and inspection route as well, i have a few friends who are electricians and they always struggle to get testing done, and have no interest in learning the I&T side of things. I did read that being a Ltd company makes you 'safer' or more attractive to a larger company who may want your services, and I didnt want to possibly limit my customer market by being a sole trader?

00ec25

britishboy wrote: »

I didnt want to possibly limit my customer market by being a sole trader?

you have several threads going on here all of which show you are still at a very early stage with no clear idea of what you want to do or who will be your clients. Basing a decision to incorporate on such vagarities is not the way to go about it.

the sums of money you mention are insignificant and it would be very costly to run them through a company given you say you are already a higher rate taxpayer.

companies pay 19% corporation tax and as a HR taxpayer you would incur 32.5% tax on your dividends. Compare that to being a sole trader paying 40% income tax and 2% NI.

longwalks1

Thanks again 00ec25, and apologies for coming across a little vague at present, you are right it is early stages, planning still.


so are you saying to start with it would be better to run it as a sole trader, but maybe have a seperate personal bank account so it makes my HMRC self assessments that much easier to do?

00ec25

britishboy wrote: »

Thanks again 00ec25, and apologies for coming across a little vague at present, you are right it is early stages, planning still.


so are you saying to start with it would be better to run it as a sole trader, but maybe have a separate personal bank account so it makes my HMRC self assessments that much easier to do?

obviously a separate bank will make it easier for you personally to administer "it", but as far as HMRC is concerned there is only you if "you" are a sole trader. So if you were ever inspected they would look at the totality of all bank accounts and would not care about segregation into a dedicated bank account

by all means do so if you can operate one without cost, it does certainly make the admin cleaner

longwalks1

Thanks 00ec25 (again), you explain things really well. I've read a couple of 'starting your own small business' type books and it just confused things even more, so thanks for being a breath of fresh air!



PS - I'll be back with more questions sometime I'm sure..

00ec25

britishboy wrote: »

so are you saying to start with it would be better to run it as a sole trader,

OK, lets spend a bit of time playing with numbers...

the KEY assumption that dictates everything set out below is your statement that your main job already makes you a Higher Rate taxpayer. Tax year 19/20 rates here. Assume self employment = PAT work so involves travel to various client sites each time, ie not regular commuting to single place.

1. SOLE TRADER status
Gross income from main (PAYE) job £55,000 (so higher rate tax payer)
Self employment gross income £15,000 less costs (travel etc) say £2,000 so SE profits = £13,000

PAYE income tax on salary
55,000 - PA 12,500 = 42,500 taxable of which 37,500 @ 20% = 7,500 plus 5,000 @ 40% = 2,000 so total income tax = £9,500

NI on salary
Gross 55,000
Class 1 Payable at 12% 50,000 - PA 8,632 = 41,368@12% = 4,964.16
Class 1 payable at 2% 55,000 - 50,000 = 5,000@2% = £100
Total NI payable: = £5,064.16

income tax on SE profits
13,000 x 40% = £5,200

NI on SE profits (above small profits threshold £8,632 so Class 2 and Class 4 chargeable)
Class 2 on 52 weeks x £3 = £156
Class 4 on 13,000 - 8632 = 4,368 @ 9% = £393.12
Total NI payable £549.12

SE post tax income 13,000 - 5200 - 549.12 = 7,250.88

2. COMPANY status

PAYE employment income = as above

Company profits:
turnover 15,000 less travel costs 2,000 less accountancy (statutory accounts@£420 incl vat) less companies house annual fee (filed online) £13 company. As existing PAYE employee there is no point drawing a salary from the company
net profit £12,567
less corporation tax @ 19% 2,387.73
post tax profits for dividends 10,179.27

all bar the obligatory £1 retained capital then taken as dividend and already HR taxpayer, so tax due on dividend:
10,179.27 - 1 = 10,178.27 dividend paid - 2,000 dividend allowance = 8,178.27 taxable @ 32.5% = 2,657.93 tax

net dividend received 10,178.27 - 2,657.93 = 7,520.34

Conclusion
if above assumptions are correct, and you can find an accountant to do the statutory accounts for £350 + VAT (our charge) you would be approx £250 per year better off as a company if you are happy to undertake the extra admin associated with running a company

in reality if it were me, I'd pay most of the company income into a pension fund and avoid tax entirely on the extra income

nmn

00ec25 wrote: »

in reality if it were me, I'd pay most of the company income into a pension fund and avoid tax entirely on the extra income

This really is the point -- apples for apples examples make it look like small chips between sole trader & incorporation but in reality; are you really going to want to draw every penny possible as a dividend every year? Probably not - plus leaving it in the co. might mean benefiting from Entrepreneurs' Relief when the company is disposed of -- much less then 32.5%. Plus pension contributinos, donations to charity, any other expenses you might have (such as the company xmas party & other "trivial benefits"), all add up to make a significant dent in what ends up taxed in the first place.

Mistral001

Sorry replying to wrong thread!