When you decide to become self-employed, one of the first decisions you’ll need to make is to decide on a business structure: operating as a sole trader, or through your own limited company.
There are a few traits that identify sole traders: you’re taxed as an individual (and don’t pay corporation tax), you have unlimited liability (your business isn’t considered a separate legal entity) and you have sole ownership over your business.
There are several reasons why the sole trader structure is the most popular option among businesses in the UK. It’s easy to set up—all you need to do is to register as self-employed with HMRC, choose a business name, and you’ll be all set to begin trading.
And if you change your mind sometime down the road—whether you decide to stop trading or to change to a limited company structure—the process of termination or transition remains fairly simple and straightforward. Unlike with limited companies, there’s no need to take additional steps such as applying to strike off your company.
You’ll also enjoy full control over your business, as there aren’t shareholders you’ll need to answer to. Sole traders also have fewer compliance requirements compared to limited company directors, which means that you’ll benefit from less paperwork, greater convenience and lower accounting fees.
When you're self-employed, you have unique financial obligations-especially when it comes to paying your taxes.
When you work for a larger corporation, or even a relatively small business, your company takes on a large percentage of handling your tax responsibilities for you.
As a freelancer or small business owner, you're on your own. You work as an independent contractor for each of the clients you work for-and they don't take taxes out of your check before they send it to you.
How then should you handle the responsibility of paying your taxes?
This guide will help you get started:
From starting your side business to going freelance full-time, becoming self-employed can feel scary and exciting all at once.
Before you jump right in, you need to ensure that you're staying on the right side of the law- and this begins with registering as self-employed with HMRC.
In doing so, you can be sure that you're paying the right amount of income tax and National Insurance Contributions, and thereby avoid paying unnecessary financial penalties.
Ready to get started? We've got all the information you need below:
If you're planning to start out on your own, one of the most important decisions you'll need to make is figuring out how you should structure your business.
As a freelancer, contractor or small business owner, there are three main types of legal structures you should consider:
It's a decision that requires careful consideration, and it's important that you seek advice from qualified professionals when you weigh out the pros and cons of each business structure. To begin with, you need to have a good grasp of the basics-and here's where our guide comes into the picture.
7 Advantages of Being a Sole Trader
You started out as a sole trader—but as your business scales, there comes a point in time where it becomes more efficient to trade as a limited company.
There are a few reasons why sole traders decide to make the transition.
Their profits may have grown to the point where it’s more tax efficient to trade as a limited company. They may decide it’s time to bring in shareholders or directors, or feel that their business could benefit from the increased credibility that a limited company structure brings.
Here’s what the process of transition involves: firstly, you need to decide if you’ll be the sole director. After which, you’ll need to notify HMRC of the change, select a business name, and register your limited company with Companies House.
Once the registration is complete, there are a few more items to cross off your checklist. You need to inform your stakeholders, set up a business bank account, set up your payroll, update your company details on your business documents and get your accounts sorted out.
If you're looking to the future with the hopes of beginning a journey running your own startup, chances are you're feeling some mixture of excitement, trepidation, and uncertainty when it comes to the finer details of your plan.
Starting your own business is an immensely fulfilling process and an excellent means to flex your creative muscles, but there's a lot of humdrum of business behind the process of turning a vision into a dream.
One of the most important (and one of the earliest) decisions in this process will centre around your business's formation. You'll have to select which type of business structure best suits your goals for the future.
While the choice may sound easy, you'll be well-served by giving the decision ample consideration. The business structure you select will have measurable implications on the way you make money and do business. It'll impact:
If you make the wrong selection when it comes time to choose a business structure, you could be faced with a myriad of complications in the future.
Paying professionals for guidance and advice once things go wrong is costly and, for many, an embarrassing affair-performing research well in advance will ensure you're making the best choice for your company and that you can avoid losing out on money or pride later on.
In the UK, the majority of self-employed people operate as sole traders. While there are many advantages to being a sole trader, you could take home more money and give your business a professional edge by setting up as a limited company.
In this article, we'll look at the advantages of operating as a private limited company to see how it could benefit you. If you're interested in seeing whether a limited company could be a good option for your business, check out our Business Structure guide. If you're already operating as a sole trader, making the jump to a limited company is more straight forward than you think.
Who can turn their nose up at the prospect of increased take-home pay? Well, that's the principle benefit of setting up a limited company and one of the main factors that drive people to switch from a sole trader.
As a director of a limited company, the way you pay tax is different from how you pay as a sole trader. As a sole trader, you'll pay 20% or more on everything you earn over the tax threshold. As a limited company, you typically pay yourself a small salary so you incur as little personal tax as possible. The majority of your income will come in the form of dividends that are taxed at a much smaller rate, meaning you're able to maximise your take-home pay.
As well as the tax benefits, paying the majority of your income through dividends means that you're able to pay less National Insurance Contributions (NICs) as these do not apply to dividend payments.
Example - Here's a quick comparison of the difference in take-home pay for a sole trader and a limited company.
As you can see, you save £965.64 as a limited company. What's not to like?
The advantages of operating as a limited company are well known. It can be a great way to maximise your take-home pay, improve your credibility with customers and limit your personal liability. Like most things in life, it's a case of what's best for your situation. While the positives outweigh the negatives for most people, there are a few things you should know before you make the jump to a limited company.
In this article, we'll outline the disadvantages of operating as a private limited company. Bear in mind that there are many advantages to a limited company and in many cases, these advantages will outweigh the disadvantages, so don't think of this as a report of doom and gloom.
There are a couple of ways to go about registering a limited company:
We've included further details in our guide on setting up a limited company.
To register a business as a sole trader, you need to:
Once you've registered, you need to fulfil your responsibilities as a sole trader. These include:
To set up a limited company, you need to:
To set up a business partnership, you need to:
Being a limited company director comes with several legal responsibilities. In addition to your statutory duties, you’re also responsible for meeting your filing deadlines.
These include:
Send the FPS on or before your employees’ payday. The FPS must be submitted each time you pay your employee. This means that if your employee is paid weekly, you’ll need to make 52 submissions across the year.
Tax season can be stressful for small business owners.
You don't have the convenience of having an employer filing for you. While there are all kinds of tips and strategies for managing your taxes, the first order of business is to get key deadlines noted on your schedule, and determine how and when to make your payment.
Here's what you need to know:
If you're paying salaries to employees or directors, you need to register for PAYE and pay your PAYE bill to HMRC.
There are various ways to make your payment.
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RTI late filing will incur a monthly penalty of £100, depending on the number of employees you have.
A late filing penalty of £100 is imposed if your tax return is up to three months late. The penalty increases if you're later than three months, or if you pay your tax bill late. Additionally, interest will be charged on late payments.
You may be required to pay a surcharge if you submit a late return. Surcharges for late payments or VAT return filings are indicated on the HMRC website.
HMRC's penalties are as follows:
The following penalties for private limited companies will be imposed if you fail to file your accounts with Companies House on time:
The first accounting year end date for a new company is the last day of the month in which the first anniversary falls on. For example, if your company was incorporated on 15 January 2021, the first accounting year end date will be 31 January 2022.
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