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Sole Trader or Limited Company?

Find out what structure is right for your business

£
Tip: This figure should exclude all business expenses i.e. rent, travel, utilities.
Brought to you by Pearl Chartered Accountants & Tax Advisers: The Accountancy and Tax Service for Businesses

Award-winning accountants to help your taxes and business growth.
Get in touch on 020 8582 0076 or visit our dedicated Pearl Accountant page.

The differences between a Limited Company and a Sole Trader

Each structure has advantages and disadvantages which are outlined below to help you choose the best option for your circumstances

Limited Company

Set up

Sole Trader

Set up

Liability

Tax

National Insurance

Accounts and tax returns

Prestige

Limited Company

Set up

Sole Trader

Set up

Tax bands and rates


The personal allowance has been increased to £12,570. This is the amount that can be earned before paying any income tax at all. For income in 2021/22 above this threshold, a sole trader/partner in England, Wales or Northern Ireland would be taxed at the following levels:

  • Basic rate of 20% on income up to £37,700
  • Higher rate of 40% on income between £37,701 and £150,000
  • Additional rate of 45% on income over £150,000
Scottish taxpayers are subject to the following bands:

  • Starter Rate of 19% on income between £12,571 and £14,667
  • Basic Rate of 20% on income between £14,668 and £25,296
  • Intermediate Rate of 21% on income between £25,297and £43,662
  • Higher Rate of 41% on income between £43,663 and £150,000
  • Top Rate of 46% on income above £150,000

View more
These bands and rates only apply to non-savings and non-dividend income. Consequently, in the case of director-shareholders who are Scottish taxpayers, their salary would be under the Scottish regime and their dividends would be subject to rest-of-UK rates and bands.

Dividends in excess of the dividend allowance of £2,000 are taxed as follows:

  • 7.5% at the Basic rate up to £37,700.
  • 32.5% at the Higher rate between £37,701 and £150,000
  • 38.1% on income over £150,000
In a limited company, losses can only be carried forward and set against future profits or set against the previous year's profits. For sole traders, losses can be set off against other income in the same tax year, carried back to previous years or carried forward against future profits.

This page should have helped you answer some important questions,
including:

  • What is a sole trader business?
  • What is a limited company?
  • Should I be a sole trader or limited company

As you can see, running your business as a sole trader and forming a limited company are two completely different things. Strictly speaking, you can’t have a sole trader company as the word ‘company’ should only be used when you’ve registered your business with Companies House (which we can help with via our company formation services). It’s worth pointing out that it is possible to make the move from sole trader to limited company.

There are advantages of being a sole trader and there are advantages to being a limited company - use the limited company vs sole trade calculator to give you an indication of what’s best for you. We hope you find it useful.

By registering as a limited company, you could save:

£
Tip: This figure should exclude all business expenses i.e. rent, travel, utilities.
Brought to you by Pearl Chartered Accountants & Tax Advisers: The Accountancy and Tax Service for Businesses

Award-winning accountants to help your taxes and business growth.
Get in touch on 020 8582 0076 or visit our dedicated Pearl Accountant page.

Disclaimer

Tax and NI rates - The company tax estimator uses the 2021/22 income tax, corporation tax and National Insurance rates.

Year end - The company tax estimator will only calculate the liabilities, net income and overall tax saving for the 2021/22 tax year. It cannot calculate the liabilities for a period of less than twelve months, more than twelve months or for a year end that is not coterminous with the tax year.

Limitations - This workbook is not equipped to deal with:

  1. Profit share ratios/shareholdings that are not equally split
  2. A salary that is in excess of the Personal Allowance
  3. Directors that are not shareholders
  4. Taxable income or any other circumstances outside of the company that might be pertinent to their tax affairs, such as Gift Aid contributions
  5. Scottish taxpayers
  6. Contracts that may fall within the scope of IR35.

Accuracy - The results provided by the company tax estimator are only as accurate as the information provided by you. The results generated by the company tax estimator should only be deemed suitable for general guidance only and should not replace or be deemed to constitute professional advice.

Assumptions and warnings

  1. This model is the "headline" tax saving - there are many other considerations.
  2. Calculations based on salary equivalent to the secondary threshold for NI-£8,840 (or lower if profits are below this level)
  3. Any other income is ignored.
  4. Assumes the £2,000 dividend allowance is available.
  5. Based on 2021/22 tax rates and the financial year 1 April - 31 March
  6. Assumes payment of full rates of NI for both Class 1 and Class 4
  7. Based on a sole proprietor/single director
  8. Assumes all available funds withdrawn from the company.
  9. Ignores Employers NI allowance - first £4,000 Ers NI not payable.

The authors accept no responsibility for any action or inaction taken as a result of using this limited company and sole trader model. We recommend you take professional advice.

Action - If the results provided by the company tax estimator show incorporation would be beneficial, it is important that you contact us before implementation. If you take, or do not take action as a result of using the company tax estimator before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

Effort has been taken to ensure the accuracy of the company tax estimator. The company tax estimator is regularly reviewed and is subject to alteration from time to time. However, as legislation can change, we advise you seek professional advice on your personal situation. For more information on incorporation, which structure is more tax efficient and how to pay corporation tax, we recommend speaking with an accountant.