What is a sole trader and a limited Company?

A sole trader is essentially a self-employed person who’s the sole owner of their business. It’s the simplest business structure out there – which is probably why it’s the most popular.

On the other hand, a limited Company is a type of business structure that has its own legal identity, separate from its owners (shareholders) and its managers (directors). This remains the case even if it’s run by just one person, acting as shareholder and director.

What’s the difference between a sole trader and a limited company?

The main differences between the sole trader and limited Company is basically the tax rates, how you pay tax. and how much liability you have over your business – including debts and assets.

Sole traders are generally self-employed business owners, whereas a limited company could have any number of employees. While setting up as a sole trader is easier than starting a limited company but it may not be the right fit for your business. So before deciding on which legal structure is for you, you need to consider the following factors.

Factors I should consider before deciding I should go for sole trader or limited company.

Self-Employed

• Owned by a single person.
• 20% to 45% income tax + national insurance contribution if your income exceeds £6,515 per year.
• The business owner is liable for the business’s debts.
• Easier in terms of reporting.
• Reports to HMRC.

Limited Company

• Owned by one or more people.
• 19% corporation tax + dividend tax if any is received + income tax on employees if any.
• The business owner has the advantage of limited liability.
• Has more strict reporting requirements and involves more paperwork.
• Reports to HMRC and Companies House.

How are sole traders and limited Companies taxed?

• Sole traders get a tax-free personal Allowance of £12,570 each year. Sole traders earning profits of £12,571-£37,700 pay 20% Income Tax; those with £37,701-£125,140 profits pay 40%; and those with profits of more than £115,140 pay 45%.
• Sole traders earning £6,725 or more a year also pay Class 2 National Insurance contributions (NICs) of £3.45 a week and Class 4 NICs of 9% are payable on profits between £11,570 and £50,270, with 2% payable on profits over £50,270 (*2023/24 tax year for all figures).
• The main rate of Corporation Tax for limited companies is 19% on taxable profits. Most small-company directors minimise their personal tax liability by paying themselves a mix of share dividends and a small salary (not enough to have to pay Income Tax, but enough to have to pay NICs that entitle them to state pension and other benefits).
• Regular dividend payments provide most of their income and the first £1,000 is tax free. Thereafter, you pay 8.25%, 33.75% or 39.35%, determined by whether you’re a basic, higher or additional rate Income Tax payer.

Is It Better to Be Self-employed or Limited Company?

A self-employed status is an attractive option for many freelancers looking to take control of their careers.

However, a self-employed individual is not entitled to some employment rights, such as maternity/paternity leave, a minimum wage, or paid holidays. Still, they can claim so me tax benefits and may be able to register for certain benefits. The downside of self-employment status is that it can be more challenging to get a loan, as banks will often require a personal guarantee when lending money.

There is also such a factor as credibility. A limited company will often be perceived as more credible than a self-employed contractor.

The deciding factor whether going for self-employment or limited company is taxes. Once you reach a certain profit level, it may become more advantageous for you to operate as a limited company.

However, the decision between becoming a sole trader versus a limited company is ultimately down to you and your personal and professional preferences.

If you are looking for an accountant to help you with your queries related to your business accounts, Call at 020 35765107 or send a message to book a free consultation.

Note: It must be noted that the information provided in all our blogs are solely for the awareness purposes and are designed with the intention to create an ease for the reader to understand the rules and their importance. However, it should never be considered as an ultimate replication of rules. RezEx Accountants (RezEx Ltd) does not own any responsibility for any unpleasant event that may arise due to misinterpretation of a specific part or whole of the information.