Limited Company Vs Sole Trader Accountant talks tax & Pros & Cons

Introduction

Welcome back to Let’s Talk Money and Mortgages. Today, Gemma is joined by Rejay, founder and director of WOS Accountancy, to discuss the differences between sole traders and limited companies, when you might change structures, and the pros and cons of each.

Overview

Q: What is the difference between a sole trader and a limited company?
A (Rejay):
Sole Trader:
Easy to set up: notify HMRC and start trading.
Owned and run by one person.
Admin is minimal.
Limited Company:
Must register with Companies House and HMRC.
Can have multiple directors and shareholders.
Offers a separate legal entity for business operations.

Benefits of Being a Sole Trader

Q: What are the advantages of operating as a sole trader?
A:
Simplicity: Easy setup and minimal admin.
Privacy: Business information is not publicly available.
Self-assessment: Only need to file a personal self-assessment annually.
Control: You make all decisions and own the business fully.

Benefits of Becoming a Limited Company

Q: When should a sole trader consider becoming a limited company?
A:
If trading profits are around £21,000 or more, tax advantages may justify the switch.
Limited Liability:
Company is a separate legal entity; personal assets are generally protected.
Liability is limited to company assets (e.g., company shares).
Business Growth Opportunities:
Easier to expand, sell shares, or bring in investors.
Can employ family members as shareholders and pay dividends, which is tax efficient.
Tax Advantages:
Corporation tax currently at 19%.
Dividend tax for basic rate taxpayers is 7.5%; higher rates for higher earners.
Can reduce overall personal tax compared to sole trader income tax and national insurance.

Tax Benefits

Q: How do taxes differ between a sole trader and a limited company?
A:
Sole Trader:
Income tax: personal allowance of £12,570, 20% basic rate, 40% higher rate.
Pay Class 2 and Class 4 National Insurance contributions.
Limited Company:
Corporation tax at 19%.
Dividends taxed at 7.5% for basic rate and 32.5% above basic rate.
Ability to share dividends among family members for tax efficiency.

Setting Up a Limited Company

Q: Is it easy to set up a limited company?
A:
Yes, can be done online in under 48 hours.
Using an accountant is recommended to assess your personal circumstances.
Must consider VAT registration, payroll setup, and legal requirements for turnover above thresholds.

Drawbacks of a Limited Company

Q: What are the disadvantages of running a limited company?
A:
Admin Burden:
Must file confirmation statements, company accounts, corporation tax returns, payroll returns, and other filings.
Privacy:
Company details are publicly available; directors and shareholders’ names are listed.
Can use a registered office address to maintain some anonymity.
Complex Winding-Up:
Closing a limited company involves more formalities than shutting down a sole trader business.

VAT Registration

Q: When should you register for VAT?
A:
Mandatory if turnover exceeds £85,000 per year.
Can register voluntarily below the threshold.
VAT collected on sales can be offset against VAT paid on business purchases.

Mortgage Considerations

Q: How does being a sole trader or limited company affect getting a mortgage?
A:
Sole Traders:
Mortgage affordability based on self-assessment tax returns (SA302) over the last three years.
Limited Companies:
Lenders may consider company profit, director salary, dividends, or daily rates for contractors.
Specialist mortgage brokers can help navigate options for self-employed or limited company owners.

Closing Advice

Always consult an accountant to determine which structure suits your personal circumstances.
Tax, liability, and growth considerations differ between sole traders and limited companies.
Using a professional can simplify setup, compliance, and financial planning.
Disclaimer: These points may not apply to everyone. Always seek professional advice for your specific situation.