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Sole Traders VS Limited Companies

    Working from home

    The two most popular business vehicles in the UK are limited companies and sole traders. However, deciding which is right for you and your business can be difficult. We have put together a handy guide to explain the difference between the two and make the decision easier for you.


    The key difference between the two types of companies is liability. In limited companies, the company operates as its own legal entity and is responsible for its own liability; whereas a sole trader personally takes on the liability of the business. This would mean, for example, that if a sole trader business has debts, they could become personal debts.


    In terms of tax, the two types of business operate differently. Limited companies pay corporation tax and owners / directors take their income as a combination of salary and dividend. Generally speaking, limited companies often pay less tax and National Insurance overall than a sole trader. While limited companies are subject to Corporation Tax, directors of limited companies can choose to take a small salary and take dividends which can minimise National Insurance payments.

    The key difference is that the profits from a sole trader business are subject to National Insurance; whereas dividend and income are not. Sole traders must pay tax on all profits over and above their personal allowance (£12,500); regardless of how much they withdraw as personal salary.

    A side-by-side look

    As can be expected, both options have their advantages and disadvantages. As a result, we have produced a table outlining some of these to make comparing the two a bit simpler.

    Limited Company

    Sole Trader

    The process of setting up a limited company is slightly more complex / expensive than setting up as a sole trader.

    The set-up of a sole trader is relatively quick and easy.

    Limited companies are distinctly separate from the business owner and are responsible for their own liability.

    A sole trader is not considered separate from the individual involved. The responsibilities for any business debt lies with them, meaning personal assets could be lost if the business fails.

    Limited companies must prepare annual accounts.

    Sole traders (unless very small) also prepare accounts and declare this information on their self assessment tax return.

    Limited companies must, by law, be transparent and provide information to Companies House such as accounts, record and directors.

    Sole trader businesses run privately, with no need to disclose their information to anyone other than HMRC.




    How would this translate to REAL businesses?

    We have created example profit and salary figures for businesses with £50,000 profit to demonstrate how sole trader, limited company with one shareholder and limited company with two shareholders businesses differ in terms of the final amount earned by the individual.

    Sole Trader:

    Profit: £50,000

    Income Tax: £9,045

    Class 2 NI: £150

    Class 4 NI: £3,723

    Net take home: £37,082

    Lower salary, limited company with one shareholder:

    Profit: £50,000

    Salary: £12,500

    Class 4 NI: £534

    Profit: £36,966

    Corporation Tax: £7,024

    Profit after tax: £29,942

    Class 1 NI: £464

    Dividend: £29,942

    Dividend tax: £2,096

    Net take home: £39,882

    Lower salary, limited company with two shareholders:

    Profit: £50,000

    Class 4 NI: 534

    Profit: £34,326

    Corporation Tax: £6,522

    Profit after tax: £27,804

    Salary 1: £12,500

    Class 1 NI: £464

    Dividend: £13,902

    Dividend tax: £893

    Salary 2: £2,640

    Class 1 NI: £0

    Dividend: £ 13,902

    Dividend tax: £153

    Net Take Home: £41,434

    The above example is dependent on many factors and would not necessarily apply to every business however, it demonstrates how the tax, National Insurance and net income levels are altered by the type of business vehicle chosen

    It is clear that limited companies and sole traders have lots of differences and deciding what is right for you can be difficult. Please feel free to contact us if you would like any more advice.