The recent budget changes mean that trading as a limited company can give a lower tax bill than trading as a sole trader.
There are a number of legal and business issues to consider before you decide to incorporate, but here we will just look at the tax issues (ignoring things such as business use of cars).
The different tax bills are as follows. In each case I have assumed that all the profits have been withdrawn from the business. The tax bills include Class 4 National Insurance for the self-employed.
Tax Bills as a Sole trader:
Profits of £25,000 gives a £5,105 tax bill
Profits of £30,000 gives a £6,555 tax bill
Profits of £35,000 gives a £8,005 tax bill
Profits of £40,000 gives a £9,455 tax bill
Profits of £45,000 gives a £11,182 tax bill
Profits of £50,000 gives a £13,183 tax bill
Tax bill as a Company:
Profits of £25,000 gives a £3,600 tax bill (saving £1,505)
Profits of £30,000 gives a £4,600 tax bill (saving £1,955)
Profits of £35,000 gives a £5,600 tax bill (saving £2,405)
Profits of £40,000 gives a £6,600 tax bill (saving £2,855)
Profits of £45,000 gives a £7,600 tax bill (saving £3,582)
Profits of £50,000 gives a £9,325 tax bill (saving £3,858)
In my view, every sole trader business with profits over £30,000 should give serious thought to incorporation. The saving is nearly 30% of your tax bill at incomes of £30,000 or more.
If you feel we can help in any way, please don’t hesitate to contact me.