Self-employment – this means being a sole trader :
Self-employment is a more relaxed, less restrictive way to run a business. There are very few start-up costs.
You are required to register with HMRC so that they know you are earning income from your business. Because this income is not taxed when you earn it, you will have to file a self-assessment tax return each year. Your income is subject to personal tax and national insurance so it is always a good idea to start saving a proportion of your earnings. Your rate of tax will depend on your circumstances, but you may pay tax at 40% if your income is high enough.
With self-employment, the tax and NI liability is based on the profits generated, even if all of that money is still in the bank account for the business to use.
You do not need to register with Companies House, file accounts that go on public record or have a separate business bank account to be a sole trader.
If your turnover goes over the threshold, you may need to register for VAT but you can still run the business in the same way, as long as you file the VAT returns.
Running a limited company :
With a limited company the business is registered with Companies House and it is a separate legal entity. This means that if the company runs into legal problems, the risk is to the company and not your own property.
The company will need a set of accounts and a company tax return each year, which have to be submitted to Companies House on public record and filed with HMRC. The company will pay tax at 20% (corporation tax) and then you as a director and shareholder will have taxable earnings based on what you take out of the company.
Money can be taken from the company either as a salary paid to you as a director, or as a dividend paid to you as a shareholder. If the business keeps hold of the money while it is growing, your personal tax situation would not be affected by the company. The tax bill for you personally is created only when you take money from the company.
Limited companies usually need a payroll so that wages can be paid out and they always need a limited company bank account. You can not use a personal bank account for a company. As with any business it is often a good idea to have a savings account in the name of the company so that you can save towards any future corporation tax payments as the money is earned.
If the company’s turnover goes over the threshold, you may need to register for VAT but you can still run the business in the same way, as long as you file the VAT returns.
In deciding whether to use a company or be a sole trader, it is worth getting professional advice. If you have other income such as wages or rental income, the decision is very different. Getting this right can save you money in tax and NI. You can start as a sole trader and then register a company later on so it is not necessarily a once in a lifetime choice. Talking these issues through with an accountant or an experienced bookkeeper is always worthwhile. Feel free to get in touch with us and we can help you start off on the right track.
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We have been a client of BW Bookkeeping since 2017 and rely on them for a range of services. They helped us change from a sole trader to a limited company and handle all our banking and VAT.
Mason Grab Hire Ltd, Aston Clinton
I have never used a bookkeeper before so I was a bit apprehensive. Working with BW has been the best decision we have made recently. I knew we needed help with behind the scenes work and this has been a real relief.
Sam B, Cheshunt
It was an experiment but BW has done my end of year tax return for 2 years now. Makes it all very easy and answers any questions. Takes all the stress out of my tax return so I can concentrate on my business.
Jaqueline Parkinson, Harpenden