Finance & Funding

Tax Guide: Sole Trader or Limited Company?

Can you save money by trading as a limited company?

Although there are many other considerations when deciding whether to be structured as a sole trader or limited company - such as increased administration and the need for more formal accounts - there are definite tax implications.

Did you know, for example, that if you make more than £20,000 of profit per annum, then for tax purposes, you will almost certainly be better off by incorporating and trading as a limited company?

See the examples below to see why, and click here to view and download an Excel sheet where you can enter your own profit figures to see how much tax you could be saving by trading as a limited company.

Example 2008/09 tax year trading as a sole trader

John a hotel owner trades as a sole trader.  His profits for the 2008/09 tax year are £20,000, so his tax & NIC liability would be as follows:

Example 2008/09 tax year trading as a limited company

Now look at the same figures if John trades as a limited company:

** National Insurance when trading as a limited company: Whilst John does not pay any national insurance he will be credited with contributions by the government as if he was earning £13,000 per annum. This will be credited at the end of the year when he submits the company's end of year return form P35.

There will be no tax or NIC payable on the salary of £5,445 as it falls below the personal allowance level assuming John has no other forms of income

Things to bear in mind

You should seek advice from your accountant - or click here to see offers by Benefit Pack accountants, some of which offer free advice on specific issues to tourism businesses - before deciding which is the best route for your business as there are a number of factors to bear in mind.  Note also:

• There are additional associated costs, particularly in the first year of trading, when setting up as a limited company, which reduce the tax saving.  These costs are typically £300 per year. However greater tax savings can be earned as profits increase and don’t forget that trading as a limited company also offers limited liability should the business fail.
• Please note if your personal income is in excess of £40,000 you may be liable to higher rate tax
• Please note that you cannot back date incorporation, tax savings can only be made from the date that the limited company starts to trade.

Download an Excel sheet to calculate possible tax savings based on your own figures

•  Click here to view and download an Excel sheet to calculate the possible tax savings on your own profits