Whilst opting to remain as a sole trader is still comfortably the most common way of running the business in the UK, it may well be worth re-evaluating this due to the fact that there are a number of significant advantages offered by making the switch to operate as a limited company.
Setting up as a limited company can prove to be extremely rewarding. As well as offering comprehensive control over the company, flexibility levels increase along with the potential to earn more than a permanent employee.
Starting a business as a limited company involves a more complex formation process than starting as a sole trader, whilst the financial and administrative responsibilities of running a limited company are also greater. However, thanks to changes in rules in recent years by the Government, instead of being self employed you might find it very well worth your while to form a limited company and save yourself paying more tax than you need.
Utilising Tax Advantages
There can be significant tax advantages derived from registering as a limited company. This is due to the fact that limited companies pay tax on their profits, and their directors are taxed on what they receive in remuneration from the company.
- Dividends and Salary – As the company’s shareholder/director, two payment options are available. You can pay yourself as an employee and you can also reap dividends as a shareholder of the company. This enables the person in question to split their income into a combination of salary and dividends, offering the potential to generate significant income tax and national insurance savings.
- National Insurance – As the owner of a company, you pay employee’s Class 1 National Insurance contributions on your employment income, offering the scope to undertake effective national insurance planning.
- Corporation Tax – The Corporation Tax regime is lighter than income tax with most small owner- managed companies paying corporation tax at a rate of 20%. This compares very favourably with the much higher 50% rate of income tax which is paid by sole traders and those people who belong to partnerships.
Aside from the beneficial tax advantages offered by registering as a limited company, there are also a variety of additional benefits.
As a limited company owner, you will be able to claim back a much wider range of expenses. You will also only get taxed on your profits, with the amount spent on your business remaining tax-free.
- Enhanced Status – Trading as a company is often perceived to have more prestige than by trading in your own name. People often have more faith when they see Limited in the company’s name even if in practice there is virtually no difference.
- Limited Liability Protection – This essentially means that as a shareholder of the company, a person cannot be sued by outsiders for the debts of the company as they are separate. Although cautious lenders and creditors may require personal guarantees, this level of security could prove to be invaluable, given certain circumstances.
- Borrowing Money – The creation of a limited company will often make it easier to raise additional funding.
- Flexibility of Ownership – New people can be easily brought into the ownership of a limited company. It also offers the opportunity to separate ownership and management if that is attractive to you especially if you want to keep your stake in the business but not be involved in the day to day management.
- Continuity – The structure of a limited company allows for exceptional levels of continuity. The company can continue even if a company member retires, dies or simply wants to move on.
Author Bio – Tom Meadows
Tom Meadows works for SRG – Chartered Accountants & Business Advisers. A firm of accountants with a difference, our roots originate from 1887 so we can offer a huge wealth of experience and the very best advice, but being a small firm we can offer you a highly individual and personal service.