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Should you trade as a limited company?

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 In each case I have assumed that all the profits have been withdrawn from the business.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.

4 Responses to “Should you trade as a limited company?”

  1. Brian Cruickshank says:

    Hi Andrew,
    I agree the tax bill figures for 2011/12 of around £5,105 for self employed (including new Class 4 NIC rates of 9%) at £25k profits but do not understand how £25k company profits net give a £3,600 tax bill, even although small comanies rate is now down to 20%. Surely the tax bill would be £5,000 ? Unless you know something I don’t know!!
    Kindly advise,
    Thanks and Regards,
    Brian Cruickshank

  2. Andrew Scott says:

    Hi Brian

    Thanks of the comment on my blog.

    If a sole trader incorporates it is normal practice for the company to pay him a salary.

    This is often fixed at £7,000 a year to avoid national insurance costs but it also fixed at a level to maintain state benefits.

    The salary is deducted from the profit.

    £25,000 less a £7,000 salary gives profit of £18,000.

    £18,000 at 20% Corporation Tax Rate gives a tax bill of £3,600

  3. HI Andrew, can I run this past you as am I doing a similar exercise for a client and having done it need to double check your figures / assumptions please.

    Lets work on the need to earn / draw £50K and I agree your self employed tax comp.

    However for Ltd Co the tax would be £50K less £7K @ 20% = £8600? and then a saving of £13183 – £8600 = £4583
    But you ignore the tax also due personally if the tax payer were to draw £43K as dividend ( balances as £7k salary) gives a gross div ( plus 10%) of £47778 and therefore tax at higher rates and a total personal liability in the region of £2500 reducing the actual save to around £2K.
    I am aware your example was meant to be simple and it highlighted the potentials but perhaps does not tell the full story???

  4. Andrew Scott says:

    Hi Arnold

    Thanks for yuor comments. The maximum net dividend that can be paid would be £34,400. The personal tax bill on this assuming no other income would be £725. The tax saving is nearly £4,000 a year as mentioned in my article

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