Member Article

Sole Trader Vs Limited Company

It is mandatory for a sole trader to pay tax on all profits excluding the personal allowance which for many taxpayers is £11,850 for the 2018/19 tax year. Once the personal allowance goes beyond the given criteria, the tax will be paid at 20% rate into the basic rate of tax if the income reaches up to £33, 500 If income is more than £33, 500, tax will be paid at 40%. If income is over £150,000, tax will be paid at 45%. It is essential to keep in mind that there are other components too. When the sole trader’s income gets to £60,000 or over, the child benefit is withdrawn. If the income is over £100,000, the personal allowance will be minimized to a particular ratio.

Limited Company Tax/ Corporation Tax

Since 1st April, 2018, limited companies are required to pay corporation tax at 19% rate. Many times, the company’s director would obtain a particular amount within their personal allowance. The amount is known as a salary but it remains below the limit of becoming payable for national insurance. This salary is considered as a business cost for the corporation tax and hence saves 19% of corporation tax on the Gross Salary. The amount of tax you pay on dividends in the 2018/19 will remain unchanged from 2017/18. The details are : 7.5% of the basic rate of tax 32.5% on higher rate of tax 38.1% on additional rates of tax £5,000 of dividends are based on the “dividend allowance” which is a tax-free allowance. The strategy employed for limited companies to remain ahead of taxes is to restrain from withdrawing all the profits from business, this strategy could serve as a measure of tax efficiency. These restrained profits can be withdrawn at a later time or situation. For example, these extractions could be employed to reinvest or invest in the company, for staff, equipment and management etc.

Some Major Differences to Know

The expenses and costs could actually be the game changers relating to tax purposes, especially they are very much different for self-employed and limited companies. The director of a limited company is preferred as an employee and can enjoy maximum tax benefits and facilities. The common facility available is the provision of a mobile phone or a laptop, these items are employed in business so they are regarded tax free. On the other hand, a sole trader would have to involve each and every equipment’s details to the profits, since they are preferred a thing of personal use.

What needs to be understood clearly!

It needs to be understood clearly that all expenses claimed, irrespective of the business structure, should be exclusive to the purposes of business trading. Sole traders get tax relief on payments that they employ into their pensions, however, the amount is limited subject to the income level of an individual. But in the context of the director of a limited company, there arises more benefits as per the rates of 2018/19, the company can subscribe the pension of the director of up to £40,000 a tax year, the company even contain the pension contributions of the previous years by paying more.

Keeping an eye to detail

The corporation tax has fallen down to 17%, which will make the annual saving on tax even higher and subsequently, limited companies become more favourable option to consider. And if the company’s owner is married, they too can share the dividends. As establishing a small business by self-employed is an easiest way, you simply have to register with HMRC. Being the sole owner, it is always simpler to manage things, even the tax return submission, you need to declare the income and expenditure and it is under the VAT threshold limit which is £85,000 for the tax year 2018/19, the amount payable will come under three figures.

The Final Judgment

A limited company is more difficult in terms of organization, management, and compliance with the rules and regulations. On the other hand, the sole trader itself is an entity which stays neutral. A has shareholders where dividends are paid to shareholders and salaries are paid to the directors. The shareholders recruit directors to run the companies. Since everything is more extensive in a limited company such as details of the shareholders and general public records, they provide identifiable tax record and data. There are specific areas in which one business structure exceeds the other but it’s not always about one aspect. Therefore, before beginning a small business, one should see these details before making the decision.

This was posted in Bdaily's Members' News section by Olivia .