Operating through a Limited Company is the most common way to work in the UK if you are working for yourself. This is because it is relatively cheap and easy to set up. It is also perceived to be the most tax advantageous way of operating. But the tax advantages are increasingly being reduced. So, our big question of the day is whether to incorporate or not incorporate?
What is a Limited Company
There are various ways you can run a business. Operating on your own and submitting your tax return to HM Revenue & Customs (HMRC) is what we often refer to as being self-employed.
If you are working with others, then you would work in a partnership and then submit partnership and personal tax returns to HMRC. You would of course need to prepare some accounts from which to draw the figures for your tax returns, but it need not be prescriptive. You just need to understand some basic rules with respect to capital and revenue expenses
Incorporating your businesses is when your business becomes a separate legal entity. The Company would be registered at Companies House, and you submit accounts and other statutory forms to them including annual declarations.
The company is owned by the shareholder/s which could be you and your family or your business partners. The company is run by the directors and again this could be just you or your family or business partners.
A director of the company is also an employee so you will not be self-employed. You will get paid under the PAYE rules and will receive a salary. As a shareholder you get a return on your shares (if the Company makes a profit) via a dividend.
Due to the various formalities it is generally more expensive to operate as a Limited Company, compared to self-employed, but there are some advantages of doing so.
Why operate through a Limited Company?
One of the main advantages of operating as a Limited Company is that you have protection under “limited liability”. For example, if your business were to fail, in most cases you would not be held personally liable for the Company’s debts. However, sometimes banks and other lenders will ask for personal guarantees from the directors which would limit that protection.
But if you are a self-employed sole trader, you would be held personally responsible for all the debts of the business. There is no limitation of liability. Your personal assets would be in danger in the event of you going under with large debts.
Another advantage of operating as a Company is that it gives the perception of being a large business or gives your business a more professional status. It could be that this status allows you to attract the right customers, suppliers and personnel are happier to work with you and lenders will look at your business in a more favourable light.
What are the tax advantages
If you operate your business through a Limited Company, it is very likely that you are both a director and a shareholder. Meaning you both own and run the business. As a result, you can reward yourself with a salary and dividends.
The taxation of both of these is very different and over the years it has been tax advantageous to take a small salary and a larger dividend. The most common route (and quite acceptable to HMRC) had been to take a salary to the secondary threshold limit (currently £758pm) and the rest as dividends. This way you receive your National Insurance (NIC) credit without a liability because the salary in just under the threshold.
Remember NIC is not due on the dividends, so this gives an advantage straight away. Dividends are also taxed at a lower rate compared to a salary.
However, after the recent Autumn Statement the gap is closing. The tax advantage is diminishing because of higher corporation tax rates (increasing to 25% in April for most businesses) and higher tax on dividends.
The table below compares the total tax liability for an individual operating under the different forms:
|Profit||Self -Employed||Ltd Company||Tax Saving|
*The above example is based on a sole trader drawing the minimum salary and the rest as dividends. The figures are based on the tax year 2023/24 rates and assumes all the profits are taken out. The rates are what we know today (November 2022).
What are the disadvantages
Your information is publicly available at Companies House. There are ways to protect your private address but still some summary information about your financial affairs is out there.
The costs of compliance are generally higher for a Limited Company. Statutory accounts will need to be prepared but you file a basic version at Companies House. You would then need to submit a Corporation Tax Return to HMRC. What’s more there will be need to run a payroll and finally, complete your own self-assessment tax return.
As a director you also have a responsibility to run your business in a legally responsible way and keep certain records. You will be able to find out more about these here
At the moment, if you are a sole trader, you just need to complete a self-assessment tax return. No other declarations to the authorities. You do of course need to keep proper records for HMRC. But remember Making Tax Digital (MTD) is being implemented for the self-employed from 6 April 2024 which will mean quarterly reporting of information to HMRC. MTD for Corporation Tax will follow probably a couple of years after that although there is no fixed date yet.
In both cases if you are VAT Registered then VAT Returns would need to be submitted. This does not change depending on your choice of operating vehicle.
Should I operate as a Limited Company
Clearly there is a lot to consider, not just the tax position. All the advantages and disadvantages should be considered. Please talk to your accountant.
There are still tax advantages of operating through a Limited Company but we wanted to highlight how the tax gap is closing and that your decision should be based on your personal preference and all the above factors.
If you would like to discuss please call or email your regular Myers Clark contact. If you are not yet working with us but would like to you can start here.