One of the questions we get asked more than any other is “should I be a sole trader or a limited company?” It’s a good question, especially with the recent increase in dividend tax and the honest answer is that it depends on you. The good news is that it’s easier to work out than you might think.
We’ve built a calculator that does the sums for you. Put in your profit and it shows what you’d pay in tax as a sole trader, and what you’d pay through a limited company, using this year’s tax rates. Try the calculator here: https://carriestokes-my.sharepoint.com/:x:/g/personal/carrie_spotlight-accounting_co_uk/IQAUoJZJ6mAwRqeddPZ5rgBCAQPqxUA1xBBeIq0dfQv0sDI?e=nVGiDe
It also looks at something a lot of people miss. If your partner has a lower income, or none at all, there can be a real tax advantage in using their allowances and lower tax bands. In a limited company, that can mean paying them a salary or dividends for a genuine role or shareholding, so more of your household income is taxed at the lower rates. The calculator includes this, so you can see what it’s worth to you. (It needs to be genuine, by the way. A shareholding with real rights attached is fine. An arrangement that only exists on paper is not.)
A saving on paper isn’t always a saving in your pocket
Here’s the bit to keep in mind. A limited company comes with extra costs: accounts to file at Companies House, a corporation tax return, payroll if you pay yourself a salary, and more admin generally. Those professional fees can eat into the tax you’ve saved, and for some people they wipe it out altogether. That’s why we’d always look at the whole picture, not just the headline tax number.
The other reason people choose a limited company
A limited company is its own legal person, with its own separate birth certificate, if you like. It’s separate from you. As a sole trader, you and the business are the same thing, so if the business runs into debt, those debts are yours personally. With a limited company, your personal liability is generally limited, so if the business were to fail, your own assets are better protected.
That protection isn’t absolute. If you’ve signed a personal guarantee for a loan or a lease, you’re still on the hook for that, and directors have legal duties they need to meet. But for many business owners, the peace of mind is worth as much as any tax saving.
Think about timing too
The tax calculator can’t tell you when to switch, and the timing needs careful thought. If your mortgage is up for renewal, or you’re planning to borrow in the near future, think before you change how you trade. Lenders look at your income differently depending on whether you’re a sole trader or a company director, and changing the way you’re set up can affect what they’ll offer you. It’s worth speaking to your mortgage adviser first, so the switch happens at a time that works for you, not against you.
So which is right for you?
Some people find the calculator tells them to stay as they are. Others find a limited company would put a good chunk of money back in their pocket, and sometimes the protection matters even more than the saving. Either way, it’s much better to know than to guess.
Run your numbers through the calculator, then have a think about what you want from your business. If you’d like to talk it through, book a free call and we’ll look at it together. You know where we are.
