Are you better off setting up your business as a sole trader or a limited company? This is the question many startup companies ask themselves. There are different tax implications for each status and different administrative requirements.
Sole trader status
Some trades are usually sole trader status e.g. builders, carpenters and electricians and also hairdressers. Sole traders are classed as self employed and are taxed at the same amount as people employed on PAYE. They are required to submit a tax return to HMR every year. The deadline for the year 2016 – 2017 is 31st January 2018. Sole traders are taxed on their profits – turnover minus expenses.
To get started you have to register for self-assessment with HMRC.
Your responsibilities are to:
- Keep records every year
- Send a self-assessment return every year
- Pay income tax on your profits and Class 2 and Class 4 National Insurance
If you work in the construction industry you’ll need to register for the Construction Industry Scheme (CIS). You must include your name and business name (if you have one) on official paperwork, for example invoices and letters. Sole trader names must not:
- include ‘limited’, ‘Ltd’, ‘limited liability partnership, ‘LLP’, ‘public limited company’ or ‘plc’
- be offensive
- be the same as an existing trademark
Limited company status
Setting up a limited company can be advantageous from a financial point of view. This is because a dividend can be applied to your profits and in 2017 this amount is £5,000. You then pay corporation tax on your remaining profits.
It is a little more onerous in terms of administration, i.e. you will need to set up a company name with Companies House and get your company incorporated and you will need to file a tax return for your company and a personal tax return (because all directors of limited companies need to file additionally a personal tax return). Companies House will give you a company registration number and you should include this in your email signature and on invoices.
To find out more about limited and sole trader status including information on amounts you can carry forward to subsequent years and Director’s salaries, why not attend one of our free monthly workshops.
Watermill Accounting Limited,
Future Business Centre, Kings Hedges Road,
Cambridge, CB4 2HY