Sole trader vs Limited Company
Sole Trader v Limited Company | Blog | Invicta Accounting LTD

Sole trader or limited company? You are done with working for someone else, you dream of being your own boss! So, you have taken the plunge and you have started your own business and you’re trading and now you want to know what is best for you in terms of tax status. Should you stay as a sole trader or should you incorporate a company and become employed through that entity?

Here at Invicta Accounting this is a common question for many of our clients and we have experience in advising them what situation suits their circumstances as it is not always a clear-cut answer.

The two statuses are actually very similar in terms of what your obligations are its just the way they are structured that is difference and Invicta Accounting can guide you through this transition, so nothing falls down the cracks.

The advantage to incorporating a company is that it creates a ‘veil of incorporation’ that effectively ring fences your personal assets and liabilities from those of the business adding that layer of protection.

The biggest misconception is that the limited company scenario is far more onerous. The main difference in terms of time is that with employed status your company needs to make a monthly remittance to the Government with any Tax and National Insurance contributions whereas sole trader you do not. But we are talking minutes here, trust us!

In terms of record keeping (bookkeeping), a sole trader still needs to keep a record of their profit and loss and any assets they hold just as if they were a company.

The main difference in the two scenarios is the potential tax and national insurance savings available.

We have modelled an individual earning £40,000 per annum and the costs of tax and NI.

Sole Trader

Income tax£4,500
Class 2 NI (£5.40 per week)£281
Class 4 NI£2,680
Total    £7,461

Limited Company

*based on salary of £7,200 and dividend of £32,800

Income tax£4,500
Employees NI£3
Employers NI£3
Total£4,506

So overall the tax and NI saving is £2,955 based on earnings of £40,000.

Obviously if you change the mix of salary and dividends in point 2 the difference will change as increased salary will attract more Employees and Employers National Insurance; however, the income tax balance will not change.

There should also be consideration including for the annual filing fee that is payable to the Isle of Man Government of £380.

If you do not have any experience in running a company you may want to appoint an accountant to take care of your affairs, especially when it comes to managing your payroll and ensuring you meet your obligations.

There is no need to panic we can take care of the administrative burden, be it under an employed or a self-employed status.

Invicta Accounting has significant experience in these areas and take pride in helping clients set out on their new business whilst working alongside them to find the best possible accounting solution for their needs.

If you wish to discuss this further or require any assistance during the current pandemic please contact us on any of our social media platforms or email us at info@invicta-accounting.com and we will arrange to contact you.

As always, stay safe and respect the protocols!