Advice on setting up a limited company for tax purposes

Gemma Newstead
Gemma Newstead

I am a sole trader and work as a builder and I have recently purchased a pub and been advised I should incorporate both into a limited company for tax purposes, is this right?

Answer:

Firstly, it is all too easy to focus purely on the tax implications of the business structure that you adopt, when in reality there are a number of different aspects that should be taken into consideration.

Addressing your specific question regarding the tax implications, companies are taxed differently from self-employed individuals. At present, you are taxed based on the profit you make per year at a rate of 20% that could rise to 40% and even 45%, as well as paying National Insurance at a rate of 9%. The money left after these amounts are paid is then yours to keep.

A company, which is a separate legal entity, is similarly taxed on the profit it makes, albeit at a slightly more favourable rate of 19%, which is due to fall to 18% then 17% over the coming few years.

However, the difference here is that the money left after the company has paid its tax still belongs to the company and in order for you to utilise this you need to extract it. This is usually done by way of a salary and dividends which is likely to trigger a tax charge on you as an individual. A common tax rate with this structure starts at 7.5%, rising to 32.5% and possibly 38.1%.

However, it is not as simple as identifying the tax rates and picking the lowest one. As mentioned above, one must consider the further differences between a limited company and a sole trade.

One of the major benefits of a limited company is that of limited liability. A limited company is as a separate legal entity from its owners and adds a layer of protection for you, therefore protecting your personal assets.

The administration of a limited company is more involved and the time input and costs associated with operating one are generally higher. A limited company is required to prepare a set of annual accounts that must be in a specific format, it must prepare an annual Corporation Tax return and maintain registers of shareholders, directors and individuals with control, updating this accordingly.

Finally, operating as a limited company can be perceived differently from operating as a sole trader. It can give a sense of size and professionalism, which may lead to new work.

As you can see, the differences can be vast and all things should be considered when deciding whether or not to incorporate, and professional advice should be sought.

If you would like to arrange a free consultation to discuss your tax position or require any other assistance, please contact Gemma Newstead on 01424 720222 or email her at GemmaN@ashdownhurrey.co.uk.