Limited company vs sole trader for the 2020/21 tax year
There are a number of factors to consider when setting up your own business. This article discusses the pros and cons of a limited company vs sole trader for the 2020/21 tax year.
Whilst there are potential tax savings as a limited company there are a number of differences you'll need to consider.
Running your business as a sole trader
A number of businesses frequently start as sole traders. This can sometimes be referred to as being self-employed.
Starting your business as a sole trader is a relatively straight forward process and there's less admin involved than a limited company. However we do recommend you carry out all business transactions via a separate designated bank account. We've discussed the benefits of operating in this way in a previous article.
Dealing with HM Revenue as a sole trader is also relatively straight-forward. As a starting point you'll need to register as self-employed with HM Revenue and file a Self-Assessment tax return. You'll also need to make the appropriate tax payments on account by the correct due dates
Trading as a limited company
Many businesses choose to start as a limited company because of the perception that this provides enhanced status in the marketplace.
Some of the advantages of trading as a limited company vs sole trader are as follows:
There are also some drawbacks to trading as a limited company and set out a few examples below:
Last and by no means least, the tax liability is one of the most important considerations if you are considering limited company vs sole trader. We set out the position for the 2020/21 tax year below.
We've also set out details for the 2019/20 tax year by way of a comparison.
It's undeniable that the dividend tax introduced by George Osborne has eroded the potential tax savings available as a limited company previously. There also appears to be an underlying trend by the government to reduce the potential tax savings between a sole trader and a limited company structure.
We'd mention that the above calculations assume that all post corporation tax profits are paid out as dividends. However one of the advantages of a limited company structure is that unlike a sole trader an individual is only subject to income tax on those profits taken personally from their company. This can be particularly advantageous for example when it comes to avoiding the child benefit tax charge or the loss of the personal allowance when income/profits exceed £100K per annum.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].