Sole Trader (Self Employed) vs Limited Company
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.
Self Employed Registration Guide
Self Employed Registration Guide
- What is a Sole Trader?
- Sole trader advantages
- Sole trader disadvantages
- How to register self employed
- Sole trader responsibilities
- Self employed tax
- Important self employed deadlines
How to register self employed with HMRC
How to register self employed with HMRC
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:
8 Advantages of Being a Sole Trader
8 Advantages of Being a Sole Trader
7 Advantages of Being a Sole Trader
What is a Sole Trader: Meaning & Definition
What is a Sole Trader: Meaning & Definition
7 Characteristics For Defining Sole Traders
Self employed tax obligations guide
Self employed tax obligations guide
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:
Switching from Self Employed to Limited Company
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.
Advantages of a limited company
Advantages of a limited company
What are the advantages of a private limited company?
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.
Advantage 1 ‚- You pay less tax and National Insurance Contributions
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.
Sole Trader
Revenue: £40,000
Expenses: £1000
Tax at 20%: £5,300
Class 2 NIC: £158.60
Class 4 NIC: £2,655
**Take-home pay: £30,886.40
**
**Limited Company
**Revenue: £40,000
Expenses: £1000
Corporation tax: £5741.04
Dividend tax at 7.5%: 1,406.92
Take-home pay: £ 31,852.04
As you can see, you save £965.64 as a limited company. What's not to like?
How to set up a Limited Company
How to set up a Limited Company
When you set up a limited company, you'll enjoy many advantages you don't get as a sole trader. Not only is it a tax-efficient way to run your business, it's also a great way to limit your personal liability and increase your credibility with customers. Additionally, it could open new avenues of work that wouldn't be open to you if you were operating as a sole trader, especially some contractor roles.
One of the disadvantages of running a limited company is that it involves a lot of paperwork, but with the help of this guide, we'll clear away the jargon and tell you exactly what you need.
If you're unsure about whether a limited company is right for you, check out our handy article comparing the differences between Limited companies and Sole Traders to see which business entity is right for you.
If you've got more important things to do than dealing with extra admin, you can always take advantage of one of our accountancy packages and we'll do all the forms and applications for you.
How do I register my business?
How do I register my business?
To register a business as a sole trader, you need to:
- Register as self-employed with HMRC
- Choose a business name
Once you've registered, you need to fulfil your responsibilities as a sole trader. These include:
- Keeping records of your sales and expenses
- Submitting a Self Assessment tax return each year
- Paying income tax and National Insurance Contributions
To set up a limited company, you need to:
- Decide what type of limited company you need
- Choose a business name
- Choose how to set up your limited company
- Complete the company formation process
- Open a business bank account
- Inform your stakeholders
- Get your VAT registration or transfer sorted out
- Set up your payroll
- Update your company details
- Get your books sorted out
To set up a business partnership, you need to:
- Choose a business name
- Choose a ‘nominated partner'
- Register with HMRC
When do I need a Limited company as a contractor?
When do I need a Limited company as a contractor?
There is no clear cut time as to when you should start working through your own limited company. With other routes available-such as operating as a sole trader, or working through an umbrella company-it is always worth weighing up what is best for you and your circumstances.
With that being said, if you plan to work as an independent contractor for the foreseeable future, opening your own limited company at the early stages can maximise your opportunities for reaping the benefits of having your own company straight away.
How do I register a limited company?
How do I register a limited company?
There are a couple of ways to go about registering a limited company:
- Register directly through Companies House
- Go through a third party: An accountant or company formation service can help you process your application, significantly lessening your admin burden. Beyond the application, a good third-party service can also provide accounting advice, help you fulfil your filing obligations and assist with other admin tasks.
We've included further details in our guide on setting up a limited company.
Limited Company Filing Deadlines
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:
- File your Self Assessment by 31st January following the end of the relevant tax year.
- If you’re VAT-registered, you need to file your VAT returns 1 month and 7 days after your VAT quarter end date.
- File your company accounts 9 months after your company year-end. If you’re in your first trading year, your first annual accounts are due 21 months after your date of incorporation
- File your Confirmation Statement up to 14 days after the due date. The due date is 12 months after the date your company was incorporated, or 12 months after the date you filed your previous Confirmation Statement.
- File your company tax return 12 months after the end of the relevant tax year.
- If you’ve just begun employing staff or using subcontractors for construction work, you need to register as an employer before an employee’s first payday.
- If you already have employees, there are a number of deadlines you need to meet for your payroll year end.
- Submit your final payroll report for the year before your employee’s final payday for the tax year ending 5th April.
- Provide your employees with the P60 by 31st May (following the end of the relevant tax year).
- File employee benefits and expenses using your payroll software, and submit your P11D and P11d(b) forms by 6th July.
- In addition to the payroll year-end deadlines, you’re also required to:
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 return and payment deadlines you need to know
Tax return and payment deadlines you need to know
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:
What deadlines do I need to know as a contractor?
What deadlines do I need to know as a contractor?
As a contractor running your own limited company, you need to be aware of the following deadlines:
- File end of year accounts to Companies House: 9 months after your company year ends. If it is your first year, the due date will be 21 months from the date your company was incorporated.
- File your confirmation statement: This is due on the anniversary of incorporation each year
- File your corporation tax return: This is due 12 months from your company year end.
- Pay your corporation tax bill: Payment is due 9 months and 1 day after the end of the company year
- PAYE RTI (Real Time Information) Returns: A submission of your company payroll has to be submitted in real time each month to HMRC. This is due on or before the intended salary payment. Any tax due from this can be payable on a quarterly or monthly basis as follows:
- the 22nd of the next tax month if you pay monthly
- the 22nd after the end of the quarter if you pay quarterly
- VAT returns: Usually submitted on a quarterly basis, the company VAT is due to be filed and paid within 1 month and 7 days from the quarter end.
- Self Assessment tax returns: Your Self Assessment Tax Return is always due to be filed by the following 31st January after the end of the tax year. This date is also the same deadline for payment of any tax due but you may also have a payment on account due by 31st July after this.
- P11D: The submission of the company P11D will need to made by 6th July with any payment of National Insurance arising due by 19th July (22nd if paid electronically)
What is your First Accounting Year End Date?
What is your First Accounting Year End Date?
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.
What are the late filing and payment penalties?
What are the late filing and payment penalties?
PAYE
RTI late filing will incur a monthly penalty of £100, depending on the number of employees you have.
Self Assessment
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.
VAT
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.
Corporation Tax
HMRC's penalties are as follows:
- 1 day late: £100
- 3 months late: An additional £100
- 6 months late: Your total corporation tax bill will be estimated, after which a penalty of 10% of unpaid tax will be imposed.
- 12 months late: An additional penalty of 10% of unpaid tax will be imposed.
Company accounts
The following penalties for private limited companies will be imposed if you fail to file your accounts with Companies House on time:
- Up to 1 month late: £150
- 1 - 3 months late: £375
- 3 - 6 months late: £750
- More than 6 months late: £1,500
What are Company Deadlines?
What are Company Deadlines?
As a limited company director, there are several important deadlines you need to be aware of. These are:
- File your Self Assessment tax return: 31st January 2022 for the 2020/2021 tax year
- Pay you Self Assessment tax: 31st January
- Registering for VAT: Register for VAT within 30 days of meeting the conditions for [compulsory registration](https://www.gov.uk/vat-registration/when-to-register#:~:text=Compulsory registration,over the last 12 months)
- Filing and paying VAT returns: 1 month and 7 days after your VAT quarter end date
- Company accounts: First year accounts are due 21 months after incorporation. Subsequent accounts are due 9 months after the year end
- Corporation tax registration: You need to register within 3 months of trading commencing.
- File your corporation tax return: 12 months following the end of your accounting period
- Corporation tax payment: 9 months and 1 day following the end of your accounting period
- File your Confirmation Statement: You need to file a confirmation statement every 12 months, within 14 days after your confirmation date.
Schedule a free consultation with a specialist self employed accountant
Speak to one of our accountants on a free 30 minute accounting consultation.
Self employed guides, calculators and articles
As a freelancer, bookkeeping is a vital part of your business. This is why it's essential to understand the importance of self-employed accounting software and how it can help you keep all your transactions in check.
In this article, we will explain everything you need to know about cash flow reports, mileage tracking, inventory tracking, and all the advanced features you can access through accounting software for freelancers. We'll also go through a few examples of how to track your business expenses, deal with bank transactions, and secure your financial data using these tools. So, let's get started!
Did you know that if you are self-employed and your business is less than twelve months old, you can be eligible for up to 30 hours of tax-free childcare? That's right. If you live in England and you follow specific criteria, you can claim a childcare account.
In this article, we'll cover everything you need to know about how you can claim tax-free childcare. We will also go through the scheme's eligibility criteria, the steps to apply, and some frequently asked questions that might come in handy when registering for this program. So, let's get started!
Workplace happiness is a hot topic for every organisation. Happier staff lead to higher retention rates, which means less time and money is spent training and recruiting replacements. Which ultimately means running a more profitable business.
While large businesses invest heavily in staff retention and attraction to drive employee satisfaction, we wonder how self-employed people and contractors can apply the same philosophy and tools to their businesses and working lives. With no HR department and limited budgets, these individuals are largely responsible for their own happiness at work.
Fortunately, it is possible to apply the principles of employee happiness that large organisations deploy to your own working life, even as a solo entrepreneur.
How does employee happiness apply to self-employment?
Work happiness is a straightforward concept. It refers to enjoyment and a positive attitude towards one's work. Happy people are excited to go to work, enjoy their work, and are more satisfied and engaged. Workplace happiness naturally impacts productivity and customer satisfaction in a positive way.
Many self-employed people may feel that happiness is a luxury that doesn’t apply to them. Self-employed business owners are far less likely to take mental health or sick days because it impacts their income. They are also more concerned with retaining their customers than their own fulfilment, which can lead to longer hours and burnout.
By refocusing on happiness at work, these self-employed individuals can boost their productivity, motivation and client service.
The FLARE Framework for Workplace Happiness and Employee Satisfaction
Very few of the factors that make employees happy at work are money. Most relate to the human aspects of work. Strong relationships, a good work-life balance, and feeling valued will always mean more to employees than incentives.
I've determined five factors that impact employee happiness, summarised by a simple acronym: FLARE. FLARE is shorthand for:
- F - Flexibility and work-life balance
- L - Learning and Development
- A- Autonomy and Responsibility
- R- Recognition and Reward
- E - Environment and Culture
By ensuring that these five elements are implemented, self-employed business owners and contractors can improve their working lives considerably.
As a sole trader, you pay yourself through personal drawings from your business. We recommend that you use a business bank account, as you’ll need to keep records of these drawings, as well as of your sales and expenses.
To set up as a sole trader, you need to take the following steps:
- Register as self-employed with HMRC online
- Choose a business name
After you’ve registered as self-employed, you’ll need to fulfill the following responsibilities as a sole trader:
1. Abide by HMRC's record keeping requirements
You need to keep records of:
- Your sales and income
- Your business expenses
- Your personal income
- VAT records, if you've registered for VAT
- PAYE records, if you have employees
You need to keep your records for at least five years.
2. Submit a Self Assessment tax return each year
You''ll need to submit a Self Assessment tax return by 31 January each year.
An accountant like GoForma can help you with completing your Self Assessment tax return. You can learn more about the registration process, deadlines, late filing and payment penalties and Making Tax Digital for Income Tax on our Self Assessment guide.
3. Pay income tax and National Insurance Contributions
You'll need to pay income tax, as well as Class 2 and Class 4 National Insurance contributions.
7 Advantages of Being a Sole Trader
Sole traders have sole ownership and full control over all aspects of their business—from how day-to-day operations are carried out to the long-term goals and strategic direction of the company.
Unlike with other business structures, you won’t have to consult shareholders, directors or partners. You’re able to make decisions on your own, act on them swiftly and remain adaptable and responsive to the needs of your customers and changes in the business landscape.
7 Characteristics For Defining Sole Traders
A sole trader is a self-employed person who is also the exclusive owner of a business. The individual is entitled to all business profits of your business after tax has been paid and is personally responsible for all losses.
While sole traders are often considered a one-man business organisation, it’s important to remember that the term ‘sole trader’ refers to the business structure - not the number of employees. While a sole trader trades alone and is self-employed, it doesn’t mean he or she performs the day-to-day operations alone without hiring employees.
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