Our sole trader vs limited company calculator shows how much tax you can save trading as a limited company. The link to our sole trader vs limited company tax calculator is below. Just complete the first 3 boxes, then go down and click calculate my tax. But first, remember there are factors other than tax to consider when comparing a sole trader vs limited company. See below for most of these factors.

Still Save Tax Despite The Dividend Tax

Dividend taxes increased in April 2016 by 7.5%. This slightly reduces the tax savings made by incorporating. However, you still save tax trading as a limited company until profits are very high. Also, you can save even more tax using a company by splitting the ownership of it. Then you can split the dividend income you take from the company. For example, if you and your spouse own 50% each you would normally share the income 50% each.

Dividend taxes increased by a further 1.25% in April 2022. But self-employed national insurance also increased 1.25%. So it made no difference to how much you can save by trading as a limited company.

Let’s look first at the different types of business structure you can choose.

Sole Trader

Sole Trader vs Limited Company

This is the simplest form of business to start. You simply carry on business on your own account. As a sole trader you pay income tax and Class 4 National Insurance on your net profit. You can employ people including your spouse. But you must only pay them for the value of the work they actually perform.

Partnership

A partnership is two or more people carrying on business together with a view to making a profit. The partners in a partnership are all joint and severally liable for partnership debts. So if anything goes wrong, each partner’s personal wealth is at risk. Personal tax bills are based on the share of partnership profits. It is advisable to have a partnership agreement to document the business arrangement between the partners. This would include how you share profits and how partners will join and leave the partnership. Even a husband and wife partnership should have a written partnership agreement. You can use this to show HMRC that both parties have a right to share the profits.

Limited Company

A limited company is a separate legal entity from its owners. These are the basic facts…

  • The limited company owns the business, not you.
  • The company must have at least one shareholder.
  • Also, it must have at least one director. But, there is no longer a requirement for private companies to have a company secretary.
  • The shareholders do not have to be directors, but they usually are also directors in small companies. A company must treat directors as employees of the company. But they do not have to draw a salary from the company. Instead they could take a dividend as a shareholder.
  • If you are the only shareholder, you will have sole ownership of the company.
  • The company pays corporation tax on its net profit after salaries but before dividends.
  • Company Law governs a company.

Main disadvantages of trading as a Sole Trader vs Limited Company…

  • A sole trader is just an individual in business. Limited Companies may appear more credible and substantial although in reality, this is not necessarily the case.
  • Sole traders are personally liable for the business for an unlimited amount. So if anything goes wrong, a sole trader’s personal assets (e.g. house) are at risk. If anything goes wrong in a company, only the company’s funds and assets are at risk. So it offers protection to the shareholders’ personal assets. If a company can’t pay its creditors, the creditors can’t normally come after your personal assets. However, banks etc often require personal guarantees from the shareholders or directors when dealing with small limited companies.
  • A Limited Company has better borrowing potential than a sole trader. That’s because it can use current assets as security by creating a floating charge over its assets.
  • It’s more difficult to share or hand over a sole trader business with other people. Different people can hold different proportions of shares in a limited company. This means you can easily pass shares onto the next generation. Also, you can pay different amounts of dividends to different shareholders

More disadvantages of trading as a Sole Trader vs Limited Company…

  • A sole trader owns all of the business so pays tax on all of the net profit. In a company, you can have different classes of shares with different rights. Such as non-voting shares for someone who only wants to invest some money into the company. Also, if you want to pay each shareholder a different dividend rate. For example, a wife owns 50 A shares and a husband owns 50 B shares. So they own the company 50% each. But they can choose to pay dividends on one type of shares and not the other. So the wife could take all of the dividends. However, there is a trap, so take advice to avoid it.
  • Having a limited company can create significant tax advantages. That’s because it pays tax on its profit at just 19%. This is a lot lower than the higher rates of personal tax (40%). However, when you take money from the company you usually pay tax on it. For example, you pay tax at 0% or 8.75% or more when you take dividends from a company.
  • If a sole trader leaves profit in the business there is no tax advantage. He/she pays tax all of the profit made. A shareholder can leave profit in a limited company by paying less dividends or salaries which will save the owner tax.

 

Main advantages of using a Sole Trader vs Limited Company…

  • Accounts are optional for a sole trader. Although you may need accounts for mortgages etc. A limited company must prepare and file annual accounts at Companies House. These are available for public inspection as is other information about the company. There are plans to make a small company’s profit and loss account available to the public.
  • A sole trader does not have to comply with Company Law. Directors are personally subject to company regulations. Directors receive fines and/or a criminal offence for failing to comply.
  • Sole traders can just cease trading and inform HMRC. It’s more complicated to wind up a company.
  • You usually pay slightly less accountancy fees as a sole trader. A limited company generally involves higher accountancy fees as there is paper work to deal with.
  • Sole traders can offset losses against other income to save tax e.g. employment income. You can’t offset a limited company’s losses against the owner’s other income. But you can offset the losses against future or past profits to save tax.

We can help you

Remember there are factors other than a Sole Trader vs Limited Company tax calculator to consider. This calculator now includes the new dividend tax rates which started in April 2016. Ask us for further advice on whether you should trade as a sole trader vs limited company. We offer a free company incorporation service for all of our clients including new ones. Our accountancy fees are from £50pm for companies.

Sole Trader vs Limited Company Tax calculator

Click >>here for our Sole Trader vs Limited Company Tax Calculator<< Then go to Tax Calculators, Incorporation Calculator, complete the first 3 boxes, or just the first box if you’re a sole trader, then go down and click Calculate.

Would you like to register as a limited company?

Talk to us. We’ll help you consider the other factors not just the result of the sole trader vs limited company tax calculator. We’ll advise you on whether you should trade as a sole trader vs limited company. Ready to choose between a sole trader vs limited company? Contact us about our accountancy services from £20pm. Or go straight to our free new company registration form. We don’t charge to register your new company. But there’s a £12 fee payable to Companies House and you’ll have to start paying us towards your company accounts.

Do you want to remain or be a sole trader?

We can help you too. Our sole trader services start from £20pm including accounts, tax return and reviews. Or if you do your own accounts we can do the tax return for you from £50pa.

The self assessment tax payments dates are simply the 31st January and 31st July, but how much you have to pay can be complicated. Below, we explain how much you have to pay on the self assessment tax payment dates.

self assessment tax payment

How the self assessment tax payment dates work

There are two self assessment tax payment dates you need to pay your tax by. The method of payment usually involves one balancing payment and two payments on account of your tax liability as follows…

  • one balancing payment on 31 January after the tax year
  • one 50% payment on account on 31 January during the tax year and
  • another 50% payment on account on 31 July after the tax year.

The payments on account are based on the net income tax and national insurance liability of the previous tax year. That’s your net tax payable after deductions for PAYE paid, but before any payments on account are deducted.

You can ignore capital gains tax of the previous year when calculating the payments on account. You pay all CGT as part of the final payment due on 31 January following the end of the tax year.

A final payment (or repayment) is due on 31 January following the tax year.

There is a 5% surcharge on any taxes that remain unpaid after 28 February, and a further 5% on taxes not paid after 31 July. For the most up to date details on self assessment tax payment penalties see here.

An example of self assessment tax payments…

If your net tax liabilities are the following:

  • 2020/21 is £0
  • 2021/22 is £2,000
  • 2022/23 is £5,000
  • 2023/24 is £800

… you will need to make the following payments by:

  • 31/01/22: £0 (remaining balance of 2020/21 £0, no payment on account required)
  • 31/07/22: £0 (no payment on account required)
  • 31/01/23: £3,000 (remaining balance on 2021/22 £2,000, plus half of 2021/22 as a payment on account towards 2022/23)
  • 31/07/23: £1,000 (half of 2021/22 as a payment on account towards 2022/23)
  • 31/01/24: £5,500 (remaining balance of 2022/23 £3,000, plus half of 2022/23 as a payment on account towards 2023/24)
  • 31/07/24: £2,500 (half of 2022/23 as a payment on account towards 2023/24)
  • 31/01/25: refund of £4,200 (excess payments on account)
  • 31/07/25: £0 (payment on account not required)

Can you avoid tax payments on account?

You don’t have to make payments on account if…

  • income tax and NIC liability for the previous year (net of tax deducted at source) is below £1,000 or
  • if your tax deducted at source (e.g. PAYE on your payslips) was more than 80% of the income tax and NIC liability for the previous year.

Reduce your tax payments on account

You can also apply to have the payments on account reduced if you expect your liability for a tax year to be less than the previous year.

Contact us if you’d like any help with reducing your self assessment tax payments or with your tax returns.

If you are thinking of becoming self employed, you’ll need to know what to do, so an accountant can be very useful even before becoming self employed. They could save you more in tax than it costs in fees if you take advice on tax and business from the start of becoming self employed.

Here’s our list of the top things to look out for when becoming self employed.

    • Appreciate that setting up and running a self employed business takes a lot of time and commitment. The rewards can be great but you have to know why you are becoming self employed with your own business and what you are getting into.
    • Identify your strengths and especially your weaknesses. Identify areas where you need to get advice.
    • Decide on your business structure. You can trade as a sole trader, partnership, limited liability partnership or limited company. They all have different tax consequences and responsibilities and you should take advice on which one is best in your circumstances. We will help you with this.
    • Produce a financial forecast so that you know what funding you are likely to need and be conservative. We can help you with this.
    • Investigate the competition thoroughly, don’t take them for granted and look to take advantage of their weaknesses. You must also constantly be on the lookout for what they are doing.
    • Research your market to ensure there is a demand for what you are offering.
    • Decide on your marketing plan. Just because you have a good product or service doesn’t mean you will sell anything. Getting the marketing right can be the difference between success and failure.
    • Decide on what staff you are likely to need and what skills they need to have. You will have to operate PAYE for any employees you have although your accountant can help with this. You’ll also have employment law and health and safety law that you must be up to scratch on.
    • business plan is an important document to put together even if you don’t need to raise finance. It will help you to properly focused. We can help you with this.
    • Design your business stationery, ensuring it not only meets your legal obligations but conveys the image you want to get across.
    • Decide on how you are going to keep your accounts and get advice from your accountant from day 1. We will help you with this.
    • Make sure you register with all the relevant authorities including HM Revenue and Customs and decide if you need to register for VAT. We will help you with this.
    • Consider all the necessary insurances you need including public liability, keyman, stock, business assets, business interruption, bad debts, motor insurance, employer’s liability (compulsory if you have employees), professional indemnity and permanent health insurance.
    • Use trusted advisors such as accountants and solicitors to help guide you. Not getting the right advice can be costly.

How we can help you

Whilst there are many common issues to consider anyone becoming self employed, every business start up situation is different and expert advice at the beginning will pay for itself many times over. Assistance with business plans for funding, setting up your book-keeping system and tax planning at the beginning are all key areas that we regularly get involved with.

This helpsheet gives you an outline of what you need to do when going self employed, and what it really means. There are a number of advantages of going self employed, but you must also comply with various regulations including the tax law and you must register as self employed with HMRC.

Form of Your Business

When you decide to work for yourself you need to choose which form your business will take. The most common forms of business are:

  • Sole-trader – you run the business on your own, usually under your own name;
  • Partnership – you and one or more other people jointly run the business;
  • Limited liability partnership – a special type of partnership that gives you and the other business owners more protection from creditors;
  • Limited company – an organisation that you own and control, which carries out the business on your behalf.

If you start your business as a sole-trader or as a partnership you are legally going self employed.

When you choose to start your business as a limited company you will normally be a director and an employee of that company. You will be employed rather than self-employed, but in practice you will work for your own business.

It is important to understand the difference between being employed by your own company, and being self-employed, as it will affect the tax you pay, and the regulations you have to comply with. This helpsheet deals only with the advantages and regulations of being self-employed.

Tax Advantages Of Going Self Employed

Cash-flow

Once you register as self employed you only have to pay income tax twice a year on 31 January and 31 July. This means you can hang on to your money for longer than an employee who has tax deducted under PAYE from every pay packet.

You must make sure you have the money ready to pay the tax when it is due as you will be charged interest on any tax paid late.

If you work in the construction industry you may have tax deducted from each of your sales invoices by the contractor you work for, under the Construction Industry Scheme (CIS). You may be able to reclaim some of the CIS deductions each year when you submit your tax return.

Expenses to Claim

  • The cost of any goods or services you use fully for your business (sometimes even if you paid for them before going self employed) can be deducted from your sales revenue for tax purposes. Where an item is used partially for your business and partly for private purposes, such as your private car or home, you can claim the business proportion of the costs against your business profits. However, you must be able to justify the business proportion with evidence such as the miles driven, or space used by the business.
  • Capital allowances – if you purchase an item that is expected to last several years, such as a van, you can claim a special deduction known as a capital allowance. The first £250,000 you spend on equipment each year qualifies for 100% capital allowances in the year of purchase. This does not include cars.
  • Loan interest – if you take out a business loan the interest paid on that loan can be deducted from your sales revenue. The loan must be taken out to fund your business, rather than a personal loan or credit card borrowings.

Government Support

  • Government funding – if you live in an area in the UK that has been designated as a regeneration area you may qualify for a government funded programme to help people going self employed or starting their own company.
  • Charitable support is also available from the Prince’s Trust throughout Britain for those aged 18 to 30 who wish to start their own business.
  • Self-employed credit – if you have been registered as unemployed for at least six months you may qualify for a self-employed credit of £50 per week if you start your own business. Ask at your local Jobcentre Plus office for more details.
  • Working and child tax credits – You may qualify for these after going self employed. Your tax credit award is based on your family’s joint income including your self-employed profits, but it will also be determined by the number of hours worked by the adults in the family, and the number of children aged under 16.

Your Tax Obligations

Tell the Taxman

When you start your own business you must register as self employed with the Taxman (HMRC). It is best to do this as soon as possible after you start to charge your customers for the goods you sell or for the services you provide. There are a few ways to register as self employed…

You must register as self employed even if you make a loss from your business. Every partner in a partnership business must register as self employed separately. If you do not register with the Taxman by 5th October following the end of the tax year in which you started your business you may be charged a penalty of up to 100% of the tax and national insurance you do not pay as a result of the failure to notify.

National Insurance

If you’re going self-employed you will need to pay two types of national insurance contributions (NICs) known as class 2 and class 4.

Tax Returns

You must complete a self-assessment tax return every year to report the income and expenses from your self employed business and any other income you have to the Tax Office.

Register for VAT

When your sales for 12 months reach the compulsory VAT threshold, you must register for VAT within 30 days.

How We Can Help You

If you’re thinking of going self employed or already have done, it’s never too soon or late to talk to us. We can help you register as self employed with the Tax Office for tax, national insurance and VAT. We can show you how to keep accurate records for your business and complete tax and VAT returns. As your business grows we can discuss tax planning ideas with you to ensure your tax bills are kept as low as possible.

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