Readers question: I want to open a cleaning company and hire a few people. I am finding it difficult to decide what is the best business structure for me, a limited company or a sole trader? Which would be the best, in terms of tax?
Experts answer: The expert for this piece is Sophie Tyler from Dolan Accountancy.
Sole trader or limited company, what’s better?
Being a sole trader means that you would be legally and financially responsible for your trading finances. This means any business debts would be linked to your own personal finances and assets.
Operating via a Limited company means that yourself individually would be a separate legal entity to the Limited company. This is one factor alone that can make operating as a Limited company more attractive.
What are the limited company taxes?
Limited company taxes would be Corporation Tax of 19%. This is calculated on the turnover, less allowable expenses.
Personally, you would be a Director and shareholder of your Limited company. This is usually more tax-efficient than being a sole trader, as you can have a salary and dividends from your Limited company. Dividends paid in the basic rate tax band are taxed at only 7.5%, after an initial amount of £2000 tax-free.
Claiming expenses through your limited company
Generally speaking, you would usually be able to claim more expenses through a Limited company, bearing in mind that these would reduce your Corporation Tax bill. Expenses should be for the purpose of performing business activities, or attracting new business, in the company name.
How to claim sole trader expenses?
Sole traders can claim similar expenses, however, the owner would need to account for the private use of the expenses (such as mobile phone or computer) and apportion any private use accordingly, so less tax relief would be available.
Sole trader taxes would be 20% personal tax due on profits over £12,500, based on the 2020/21 tax rates and allowances.
You would also need to pay the following National Insurances; Class 2 NI of £3.05 a week, and Class 4 NI of 9% on profits between £8,632 and £50,000, and 2% on profits over £50,000.
You’ll need to bear in mind that sole trader income is always taxed each year; however, if you have a Limited company, are a 100% shareholder, and did not wish to pay dividends to yourself, you would not have to, and you would therefore not have that personal tax bill.
What is the best business structure for you?
Other factors to consider would be the filing requirements of each option. A Limited company must submit annual accounts to Companies House and annual Corporation Tax returns to HMRC. A sole trader has no legal obligation to provide accounts, but you must still submit a personal tax return each year to HMRC. You would usually find that the fees for a Limited company would be much higher than the fees for an accountant assisting with only your Sole Trader tax return.
Overall, the Limited company option has more administration and filing requirements. However, you would usually find it more tax-efficient to go down the Limited company route. I would advise speaking to an Accountant in detail however as they will be able to go over your specific income and could then give you estimated figures so you can see the difference with each option.
More on why a limited company is better than a sole trader and limited company and sole trader comparison.
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