I'm often asked whether being self-employed or a limited company is the best way to start in business. With so many people being made redundant thanks to the economic impact of the Coronavirus pandemic, I thought I should share my views ...
For a self-employed person, all profits are taxable in the financial year that they are earned. There is no way to defer those profits to another year, but that does mean it's reasonably simple to do your bookkeeping and straightforward for an accountant to work out what you owe HMRC.
However, Corporation Tax is only 19%, compared with 20% or 40% Income Tax for self-employed people pay. As a limited company is a legal entity in its own right, directors have flexibility about when to take out profits if it means they are likely to pay higher tax rates themselves.
Income from a limited company is normally in the form of dividends which are not subject to National Insurance contributions. The dividend rate is also significantly lower than Income Tax on self-employment income for basic rate taxpayers.
Many individuals form limited companies because it is otherwise quite hard to obtain contracts as a self-employed person. If you are ordering large amounts of stock, then a limited company can protect you with its limited liability, and personal possessions are generally protected from any claim against the company itself.
Accountancy costs will increase dramatically when you run a limited company, so you have to decide if these extra costs are worth the trouble. The company also has to be regulated by Companies House, and there are strict rules on reporting and of the behaviour of directors and other company officials.
I always advise that if there isn't a specific reason to form a limited company, go self-employed first and see how you like it. Self-employment is relatively straightforward, and it is possible to get good cloud accounting software that will file your tax returns for you, discounting the need for an accountant completely (although generally, you'll pay more tax if you do it yourself!)
Self-employment also means that if you make a loss, particularly in the initial years, you may be able to offset that loss against say a salary earnt from your previous job and get a tax rebate from HMRC, which wouldn't be possible in a limited company. Your decision on either going self-employed or starting a limited company will be based on your individual circumstances.
Whichever route you are thinking of taking, self-employed or a limited company, I strongly recommend you take professional advice before making any final decisions.
If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.