Director of Tao Business Services, Nic Cooper tackles an interesting question:
I have often been asked this question. If there was a simple, clear-cut way of answering it, this blog wouldn’t be necessary, I guess!
However, there are a few points to consider before you decide;
Is there a tax advantage with a Limited Company? – Well, there could well be, depending on how much you want/need/can afford to pay yourself and what your levels of sales and profit are. Corporation Tax is now 19% and Income Tax 20% but either or both of those could change. You can pay dividends via a Limited Company but now only the first £5,000 per year is tax free. However, your salary and pension, for example, are business costs for a Limited Company and so can be deducted from sales before applying Corporation Tax.
With sole trader status, there is no distinction between personal and business assets, whereas with a Limited Company there is. This could be an advantage under certain circumstances.
Limited Company status can project a different image than a sole trader but be mindful that there are additional responsibilities with a Limited Company, such as insurances, preparing and filing annual accounts, complying with tax and labour law etc, as well as the additional costs that go with these.
And a final caution regarding IR35 legislation. If you set up a Limited Company with yourself as the sole Shareholder and Director as you believe you’ll be financially better off but you only have 1 customer or 1 main customer, HMRC may view this as you being effectively employed by that customer and this could lead to National Insurance being due. The actor, Robert Glenister was recently “caught” on this very point.
So, no, there isn’t a simple, clear-cut answer but I can advise you on whether a Limited Company might be the right thing for you. Contact me and I’ll be happy to have a free chat with you.