If you run your own business, it’s inevitable that you’re going to be faced with the decision of whether you want to trade as a sole trader or limited company. Which is best for your circumstances? Here’s a quick summary of the main differences between trading as a sole trader or a limited company.
As a sole trader you are the business, meaning any business debts will become your personal debts. Any personal items, such as your house, will not be protected. A limited company has its own legal identity and is kept separate from its owners (shareholders) and its managers (directors). It doesn’t matter if a single person runs the company, as they will act as both shareholder and director.
As a sole trader, you’ll pay tax on business profits using the self-assessment tax return system. The online tax return must be returned by 31st January after the end of the tax year. For a limited company, tax is deducted from directors’ salaries using Pay As You Earn (PAYE). This is paid at regular intervals to HM Revenue & Customs (HMRC). Unless no pay or benefits are given, all directors are obliged to complete a tax return. If the directors are shareholders, they may receive dividends from the company.
Sole traders pay Class 2 NI contributions of £2.95 per week, and for any profits in excess of £8,424, a Class 4 contribution is also made. For limited companies, both employees’ and employer’s national insurance is payable on directors’ salaries and bonuses.
Accounts and Tax Returns
Sole traders need to keep a record of business expenses and income to fill in their tax returns, but are not required to have or file any annual accounts. Limited companies are legally required to prepare annual accounts from the company’s records at the end of each financial year. This is kept with HMRC and sent to all shareholders and Companies House. If you’re weighing up your options and need assistance, contact One Click Group to discuss our range of Umbrella services and we can help you as a contractor.
Along with over 13 years experience in the contractor payroll industry, and after spending most of his working life as a financial advisor in the regulated financial services industry, Mike has garnered an extensive network of contacts in the recruitment industry, many of whom trust both him and the One Click Group to handle their accounting. Mike has also been a member of various industry bodies throughout the years, such as the British Institute of Recruiters, in order to champion best practices across the contractor payroll industry.