A sole-trader or a LTD company are the two most popular methods of doing business in the UK – but which type is the right choice for you. In this article we can help you decide!
A sole-trader in the UK
Being self-employed (sole-trader) in the UK requires you to have a National Insurance Number (NIN) and an address in the UK. It is a simpler form of enterprise and common business examples include: restaurants, barbers/hairdressers, plumbers and electricians.
Sole-traders don’t pay corporation tax like LTDs do, but instead pay income tax and national insurance, depending on how much profit they make. Income tax is applied when your profit or your wage is above £12,500 per year.
Sole-traders must also pay national insurance in either class 2 or class 4 brackets, but you do not need to pay NI contributions until your profits exceed £6,205.
Class 2 NI – For profits above £6,365. Payment of £3 a week
Class 4 NI – For profits above £8,632. 9% on profits between £8,632 and £50,000 and 2% on profits over £50,000
How to register as a sole-trader
Registering as a sole-trader is simple procedure and involves informing HMRC that you are self-employed and that you need to pay tax through self assessment. The process involves registering for class 2/4 NIC and for self assessment.This can be done on the GOV website portal.
As a sole-trader you will have many responsibilities including:
- Keeping up to date records of the company’s revenue and expenses
- Providing your annual tax self assessment to HMRC
- Working out how much income tax and NI you need to pay (there is an online calculator on the GOV website).
- Repayment of the company’s debts yourself
- Registering on the Construction Industry Scheme, if you’re planning on operating in construction
Advantages of being a sole-trader
- Simple accounting
- Generous allowance for tax free income
- Small contributions to national insurance
- Privacy for your business, no information has to be given at the Companies House. Could possibility be a disadvantage (depending on how you operate) as there will be no public record of your business and some companies may avoid doing business with you.
- No need or obligation to pay corporation tax
- Possibility for retirement in the UK with state pension
Disadvantages of being a sole-trader
- Liability! As a sole-trader you have unlimited liability, as your business is not a separate legal entity. This means you bear full responsibility for company debts. In the worst case scenario your assets could be seized to cover debts that you couldn’t pay (could be your house, car or even your computer).
- Complex procedure when you want to sell the business, as only the assets can be transferred and the buying entity must form its own business structure.
- Needing to be present in the UK for most of the year (at least 183 days), so you can be a British tax resident.
Costs for registering as a sole-trader and settling tax
We charge 60 GBP for registering your sole-trader business. A monthly self-assessment and a submission of your annual self-assessment by us will cost from 50 GBP/month.
If you have any questions about running or starting a sole-trader business in the UK, then please don’t hesitate to contact us or arrange a consultation with one our experts. We will be happy to assist you!
A LTD company in the UK (Limited Company)
A Limited Company, also known as a private limited company or a limited liability company in other jurisdictions. A LTD company is most commonly ‘limited’ by its shares, which means shareholder(s) are only liable to pay potential creditors against the original capital invested. Your assets outside the the company are safe because the company exists as a separate legal entity. Running a LTD company means you can be the sole shareholder and appoint yourself as the director.
Advantages of setting up and running a LTD company
Savings in taxes and a large tax free amount
If you’re the sole director and shareholder in your company, then you can set your salary as you please! The income tax free allowance is 12,500 GBP/year, so paying yourself a wage up to this value will stop you from paying income tax. In the UK if you earn a wage lower than 8424 GBP/year, you will not pay any income taxes or national insurance <see UK income and corporation tax>. In your LTD company you can employ up to 3 directors. This allows a withdrawal from the company of 25,272 GBP/year without any tax or insurance deductions. Even with revenues above this amount, your LTD will still be financially viable in the UK (even with addition of corporation and income taxes).
Smooth and simple running of your business
There is no time wasted each month on bureaucratic procedures, like there is in many other countries. Once your company is registered in the UK, you can send us invoices that are issued/ received by your company. We can represent your business and take care of all your tax and accounting needs. Tax audits in the UK are fairly rare and only happen when HMRC suspects something is wrong with your company tax returns. Even if this does happen, the procedure will likely be a phone call, which can be done with you or your accountant. HMRC doesn’t have the resources to systematically audit every UK business.
A British state pension
As a director of a LTD in the UK, you will have right to receive a British pension. This amount will vary depending on how many years you work whilst contributing to national insurance. The minimum you can receive is about £48.17 per week after 10 qualifying years and the maximum is £168.60/week, which requires 35 years of work. To work out what pension you might receive, take the max at £168.60 and divide it by 35, then multiply it by the number of qualifying years you have been working (running your company and paying NI contributions). Note, qualifying years are gained when you’re employed and earning more than £166 per week (£8,632/year).
Disadvantages of a LTD company
The main disadvantage of operating as a LTD is that you will have to pay corporation tax on any profits you make. This could neutralize the savings you made on income tax. To avoid this many companies use their all their revenue to pay director salaries.
Registering a LTD company with us!
When registering a LTD company with our cooperation, it is a very simple procedure that requires you to fill in a form with some basic information for HMRC. We will take care of everything else involved!
Costs of registering your LTD
Full registration:
- Providing an address for registration
- Registering your company at Companies House
- Retrieving your certificate of incorporation from Companies House
- Filing the Memorandum of Association at Companies House
- Submitting company information at Companies House
- Obtaining your UTR number from HMRC
- Registering for PAYE
- Start payroll for director(s)
- Further consultation regarding opening a bank account
Full registration fees:
Registration for clients who have a NIN (processing time 3/4 working days): 120 GBP
Registration for client who does not possess a NIN (processing time 3/4 working days): 190 GBP
Accounting services for your LTD company:
- All bookkeeping
- Preparation of annual accounts for HMRC
- Tax returns for HMRC
- Filing annual accounts with Companies House
- Dealing with payroll (single director)
- Handling PAYE P60 and PAYE P11D
- Act as representative before HMRC (agent)
- Consult with you on accounting services
- Provide a virtual office (if necessary)
Full accounting monthly cost: £110-£150
If you are planning to start a business but you don’t know whether it’s going to take off, then consider registering for an Incubator LTD – a simpler, transitional form of starting a business in the UK.
LTDs and sole-traders – Summary
Operating as a sole-trader requires you to have a presence in the UK of at least 183 days/year. You must have a UK address and be a British tax resident. Running your business as a LTD only requires the tax residence to be located in the UK.
National insurance contributions have to paid as soon as your sole-trader company starts receiving income greater than £6,365/annum, but these are however very small payments (£3/week). LTD NI payments are actually greater than sole-traders at higher revenues. LTDs are also obliged to pay corporation tax on their profits, but many companies avoid this by paying all income in the form of directors’ salaries.
As a sole-trader you have unlimited liability and accept full responsibility for all the debts incurred by the company, while in a LTD you can only be responsible as a shareholder for the amount originally invested into the company (limited liability).
Investing, selling or dividing a LTD is much simpler as well, due to the company being made of shares. The shares facilitate the process of allowing other individuals into the company, to accelerate development e.g. investors.
Sole-trader businesses are very commonly set up by individuals living in the UK but a LTD can be profitable whether you live the UK or elsewhere.
If you’re interested in accounting for your sole-trader business in the UK or you’d like to set up a LTD, then please contact us or arrange a free consultation with one of our experts. We will be happy to assist you and answer any questions you may have.
info@owlaccounts.com
Glossary
| Word/Term | Definition/description |
| Self Assessment (business/tax) | An evaluation and calculation of one’s taxable liability, submitted to the tax office (HMRC). |
| Bear (Verb) | To accept, endure or be obliged to. E.g. To bear responsibility for failures of the company. |
| Bureaucratic/ Bureaucracy | Bureaucracy refers to the body of officials or admin, typically related to governmental powers. Bureaucratic in this case, refers to procedures that have an input of bureaucracy i.e. the government is involved in some capacity. |
| Entity (in business) | Any organisation or business that can be subject to legal rights and obligations as a separate body. A corporation is a common example of a business entity. |
| Facilitate | To make something easier/ less difficult e.g. Reading books facilitates the development of one’s knowledge. |
| HMRC | Her Majesty’s Revenue and Customs – Government body responsible for the collection of taxes and NI. |
| Jurisdiction(s) | The territory in which a specific authority or practice is exercised. In this sense referring to the name given to a limited company in other ‘jurisdictions’ i.e. in other countries. |
| Liable | Legally responsible for. E.g. He’s liable to pay tax. |
| Memorandum | A document stating the terms of a contract and other legal details. It is essential to file a memorandum of association when forming a LTD in the UK. |
| Neutralize | To make something ineffective by applying an opposite force or effect. |
| Obliged/Obligated | Being ‘bound’ to do something, either legally or morally. LTD companies are obliged to pay corporation tax on their profits. |
| Seized | To take forcible possession of something. In this case the removal of assets by a high court enforcement officer, when you can’t repay debts. |
| Transitional | Relating to or characteristic of a process or period of transition. A transition is the change of one state or position to another. For example, a period of change is a transitional period. |
| UTR | An acronym short for Unique Taxpayer Reference number. It is 10 digits long and is issued by HMRC when you register your business (LTD). |
| Viable | Capable of working or functioning successfully. E.g. The business plan was economically viable. |