Small Business Accountants | London | East London | Taj Accountants - Taj Accountants - the best accountants in Whitechapel, East London, offering qualitative small business accounting services. Call us at:+44-203-759 5649.

Sole Traders Vs Limited Company; The Real Difference!

Abul Nurujjaman, 

Sole Traders/Self Employed Tax

It is obligatory for sole traders to pay tax on all profits except the personal allowance, which, for most taxpayers is £11,500 for the 2017/18 tax year.


After the personal allowance exceeds the given criteria, the tax will be paid at the rate of 20% into the basic rate of tax if the income is up to £33, 500.


Tax will be paid 40% on the income of more than £33, 500,


Tax will be paid 45% on the income of over £150,000


It is important to keep in mind that there are other elements too. When the income of a sole trader gets to £60,000 or over, the child benefit is withdrawn.


And when the income is over £100,000, the personal allowance will be reduced to a certain ratio.



Limited Company Tax/ Corporation Tax

Since April 1st, 2017, limited companies are obligated to pay corporation tax at a rate of 19%.

Most of the times, the company s director would take a certain amount of money within their personal allowance. The amount is named as a salary but it remains under the limit of becoming payable for national insurance. This salary is regarded as a business cost for the corporation tax and hence 19% of corporation tax is saved on the Gross salary. 

The 2017/18 tax year dividend taxes are


7.5% of the basic rate of tax


32.5% on higher rate of tax


and 38.1% on additional rates of tax


First £5,000 of dividends are subjected to the "dividend allowance" which is a tax-free allowance.
A trick for limited companies to stay ahead of taxes is to abstain from withdrawing all the profits from the business, this strategy could later serve as a tax efficiency measure. These retained profits can be extracted at a later time or situation. For instance, these extractions could be used to invest or reinvest in the company, for equipment, staff, and management etc.


Some More Differences To Know


The costs and expenses could really be the game changers regarding tax purposes, specifically, they are clearly different for self-employed and limited companies respectively.


The director of a limited company is considered an employee and can enjoy a lot of tax benefits and facilities. The most common among such is the provision of a laptop or a mobile phone, these items are used in business so they are considered tax free. A sole trader, on the other hand, would have to include each and every equipment s details to the profits, since they are considered a thing of personal use.


Things To Know!


What needs to be understood clearly is that all the expenses claimed, regardless of the business structure, should be exclusive to business trading purposes.


Sole traders can have tax relief on the payments that they put into their pensions, however, that amount has a limited depending on the income level of the individual. But in the case of a director of a limited company, there could be more benefits as per the rates of 2017/18, the company can contribute to the pension of the director of up to £40,000 a tax year, the company even accommodate the pension contributions of the preceding years by paying even more. Even though the salary and pension rules are written in clear details on HMRC s website, it is advisable to talk to small business accountants regarding taxes and pensions in detail. Taj Accountants is a specialist team of accountants handling numerous small business Accounts and Legal matters. Their expert team can provide the best advice on business analysis, taxation system and on several other areas.


Keep An Eye On The Updates


Interestingly, the corporation tax rate is going to be dropped to 17%, this makes the annual saving on tax even greater and consequently, limited companies become an even more beneficial option.


And also, if the owner of the company is married, they can share some dividends too. 
Like mentioned earlier, setting up a small business by self-employing is the simplest way, you just have to register with HMRC. Being the sole owner, it is always easier to administer things, even the tax return submission, you can declare the income and expenditure and if it is under the VAT limit which is £85,000 for the tax year 17/18, the amount payable will remain under three figures.


The Final Verdict


A limited company is more complicated in terms of management, organization, and compliance with the rules and regulations whereas the sole trader is the entity himself so he stays neutral.


A limited Company has shareholders, dividends are paid to shareholders and salaries are paid to the directors. The shareholders hire directors to operate the companies.


Since everything is more detailed in a limited company such as general public records and details of the shareholders, they offer a traceable tax record and data.

By withdrawing lesser amounts of profits, the limited company can also maximize its tax efficiency.

There are certain areas in which one business structure outweighs the other but it s not always about one thing. Therefore, before starting a small business, one should go through these details before making the decision.






Disclaimer: The information provided in this blog is brought to you by Taj Accountants. As you are reading this blog of your own free will, any information taken from this blog is at your risk. Before using the information provided to apply, to your business seek professional or legal advice.Taj accountants will not be liable for any damages.

Copy link