Should You Register As Self-Employed Or A Limited Company?
Are You Starting A Business?
POSTED BY HELEN BEAUMONT ON 21/10/2020 @ 8:00AM
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 ...
If you wondering if you should register as self-employed or a limited company, always take professional advice first!
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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.
"Limited companies get taxed on the
same trading profits!"
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.
"There are disadvantages though!"
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.
Until next time ...
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about being self-employed or a limited company, call me on 01908 774323, leave a comment below or click here to ping over an email and let's see how I can help.
About Helen Beaumont ...
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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