LTD Co. VS Sole Trader and Registering for VAT?

ChillyWill

Hi gang, I've done some searching on the forum (and elsewhere on this) and found various answers but none that feel particularly definitive - specifically for my situation so would really appreciate any input here.

Nutshell: having been made redundant at the start of the year, I've started doing some freelance work as I look for my next perm gig. Thinking I'd only be doing this a short while (and always by myself VS hiring other people etc) I thought it would be simpler to register as a Sole Trader VS a LTD Co. I also didn't register for VAT as - again - I didn't think I'd be doing this long enough to breach that 85k VAT threshold.

However... I am getting more established now and could be doing this longer than expected, so what I am now pondering is this:

- Is there any reason I should change to a LTD Co. VS remaining a sole trader?

- Is there any reason to register for (and charge my clients) VAT - even if I don't end up breaching that 85k threshold?

- Or should I just continue as I am and ONLY register for VAT if it looks like I will be earning more than 85k this year?

Apologies for the newb questions, but want to make sure that I am doing things by the book and not short-changing myself anywhere. Thanks in advance for any/all thoughts.

/ Will

tripled

The main reasons for working through a limited co are to separate your company and personal affairs, which can be useful for tax efficiency and to limit liability if you get sued. The consequence is more accounting overhead as you now have two sets of accounts to do. There are certain statutory responsibilities as a company director, they are not particularly onerous but you need to be familiar with them, or get a good accountant (or ideally both).

In terms of tax, you can benefit from a lower personal tax rate. This is usually done by paying a combination of salary and dividends, which saves on national insurance contributions. You can also take advantage of a salary sacrifice pension. In a good year you could defer some income, leaving it in the company, which can smooth out your personal income (e.g. instead of earning 60k one year and 40k the next, you could leave 10k in the company and draw it the following year, giving you two years at 50k and avoiding 10k at a higher tax rate, affecting child benefit, etc.). A lot of contractors and freelancers like to build up a "war chest" in their ltd co.

In terms of VAT, being VAT registered allows you to claim back VAT on purchases, so can be useful even if you are under £85k turnover. It is more administration (accounting and record keeping), although going on the flat rate scheme can reduce that to an extent. If your clients are VAT registered businesses, they generally won't care either way. However, if your clients are not VAT registered, adding 20% VAT on top will make you more expensive.

ChillyWill

Brilliant detail - thanks for this @tripled.