Should I Register as a Limited Company or Stay as a Sole Trader?

I thought it might be useful to show the differences in a table format.

This table is only a summary, and you should read and consider the facts on the Government Gateway or consult with an expert before making a final decision.

Description	Sole Trader	Limited Company
Legal entity	All Income less expenses = Profits are taxed in self-assessment. Sole trader and individual are the same thing	Separate entity and separate accounts from directors and shareholders. Best way to separate the business from the individual.
Tax returns and documents to prepare	Prepare a self-assessment & profit and loss statement – submit to HMRC	Financial statements & Corporation tax return submit to Companies House and HMRC
Accounting versus Cash	Cash is not equal to net profit	Cash is not equal to net profit
Salary and Drawings	Salary taken is not a tax-deductible expense	Salary taken (including PAYE) is expense
Timeline	Only file once a year and that is a self-assessment – deadline is January. Prepayment is due in July based on the previous year’s tax liability divided in half.	Must file financials to Companies House & file a corporation tax return to HMRC and a confirmation statement depending on registration date of company. Deadlines – 9 months after year end
How to register?	Easy to register – phone HMRC and register as sole trader and get a UTR	Register at Companies house a company and need to file confirmation statements yearly.
Income earned	Income belongs to the sole trader, and it is the sole trader’s responsibility to account for the business properly and make sure the deductible expenses are accounted for. HMRC will take the money received as income and tax that if the taxpayer does not prove/show expenses	The income belongs to the entity. Directors are responsible for the running of the business and have a fiduciary duty to run the company properly in terms of the companies act.
Tax deductible expenses	Tax deductible expenses: Expenses in production of income is allowed Need to be able to prove that the expenses were in production of income i.e., slips, receipts etc. Home office expenses, travel expenses, training expenses, printing & stationery, subscription fees etc If you are a property investor, you can’t deduct the full interest expense as a tax deduction in your self-assessment (Restricting finance cost relief for individual landlords - GOV.UK (www.gov.uk)) etc	Tax deductible expenses: Expenses in production of income is allowed.  Salaries paid Need to be able to prove that the expenses were in production of income i.e., slips, receipts, etc. Home office expenses, travel expenses, training expenses, printing & stationery, subscription fees etc You can deduct the full interest paid on your mortgage payments as an expense etc
Accounting Package	Accounting Packages – Wave, QuickBooks, Xero etc Nice to have - Hubdocs	Accounting Packages – Wave, QuickBooks, Xero etc Nice to have - Hubdocs
VAT Registration	Only need to register for VAT when you exceed £85 000 turnover i.e. income. Consider flat rate scheme – easier to administrate	Only need to register for VAT when over £85000 turnover i.e. income. Consider flat rate scheme – easier to administrate
Bank Account	Good to have a separate bank account for business purposes	Must have a separate bank account for business purposes
Naming	Sole trader alone	Business name will have a limited or ltd at the end Director and Shareholder
Other taxes and HMRC liabilities	Class 2 National Insurance if your profits are £6 725 (£3.15 a week) or more a year. Class 4 National Insurance if your profits are £9,569 or more a year (10.25% on profits between £11 909 and £50 270 3.25% on profits over £50,270) Self-employed National Insurance rates - GOV.UK (www.gov.uk)	Dividend tax 8.75% on Basic Rate 33.75% on Higher Rate 39.35% on Additional Rate
Personal allowance or tax-free portions	£12 570 personal allowance	First £2000 dividends are tax free in your personal capacity (but remember you would have already paid corporation tax).
Tax Rate	Starter tax rate – 19% Basic Rate – 20% Goes up to 46% https://www.gov.uk/scottish-income-tax	Corporation tax rate at 19%.  From the 1st of April 2023 – the corporation tax rate will increase to 25% for profits over £250 000.  Dividends are taxed separately – after corporation tax is paid
CGT	Capital Gains Tax applicable at 10%/20% on other assets or/and 18%/28% on property. You will receive a CGT allowance of £12 300 per year Get a private home exemption when sold.  Can get Entrepreneurs relief when sale of more than 5% of shares in a business	No Capital Gains Tax.  All assets sold are included in the Corporation tax return. Normal costs that qualify for tax deductions are allowed. No private home exemption.
Other important things	If HMRC is expecting a self-assessment and you don’t file a return, you will be fined.	SIC (section industry code) is important and this should reflect what your business does. If HMRC and Companies house is expecting a submission and you don’t file, you will be fined.

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