Moving from Self Employed to Limited

When associated costs are taken into account, you will likely take home more money as a sole trader when your contract earnings are lower. Also, if you are unsure if you will continue working for yourself, it is more difficult and costly to close down a Limited Company, compared to ceasing as a sole trader.

As your contracting career grows, setting up a Limited Company can make sense for a variety of reasons. Perhaps your earnings are increasing and you are looking for more tax efficiency, in order to take home more money. You may find certain clients who will only engage with a Limited Company and not with a sole trader. Or maybe you will be taking on a higher-risk contract and want your personal assets to be protected if something goes wrong. This guide looks at the reasons to set up a Limited Company and the steps you would need to take.

Advantages of moving from Self Employed to Limited?

Tax Efficiencies: sole trader pays tax on profits as they earn them, as well as National Insurance on all declared profits. Once you are earning enough – usually around £25,000 per year – it can be more efficient to trade through a Limited Company. You will be able to take advantage of your personal tax allowance, by paying yourself a salary through the company payroll and also a separate tax allowance by paying yourself dividends as a Director – not subject to National Insurance. If income is fluctuating year on year, you can also leave profits in the business and draw them in a year with lower earnings.

Expenses: Another key part of the tax efficiency in a Limited company is how expenses are treated. Expenses for a sole trader are as simple as keeping a track of your direct business expenditure and including the figure on a self-assessment tax return. A Limited Company benefits from different allowances – particularly claiming 45p per mile for business mileage, instead of vehicle running costs. Other allowable expenses through a Limited Company include:

• Rental payments on business premises
• Business utility bills
• Costs associated with running your business bank account
• Stock purchased for resale
• Equipment or tools required to operate your business
• Travel and accommodation costs, and associated allowances

Risk and Liability: As the name suggests, you have limited liability when operating through a Limited Company. It is the company which engages with clients and suppliers – any responsibility and risk in a contract belongs to the Limited Company. This means that if you are sued or end up with genuine debts through your company, only company assets are at risk. In comparison, if things go wrong when operating as a sole trader, your personal assets – including savings, car and house – aren’t protected.

Credibility: Although there is no practical difference between a contractor operating as a sole trader or through a Limited Company, being the Director of a Limited Company can give you more credibility in the eyes of clients and suppliers. Indeed, some businesses will only trade with other companies and won’t do business with a sole trader. Setting up a Limited Company can make your operation seem larger and more reliable and gives you an extra degree of respectability.

Disadvantages of moving from Self Employed to Limited

Operating a Limited Company isn’t always the right option. If you’re expecting to earn under £25,000 in a year, it is likely the extra administration and costs involved in becoming a company Director will outweigh the benefits.

You will also need to be on top of your record keeping and administration, as the penalties for late or incorrect filing of accounts are greater. However, a good contractor accountant will help keep on top of this and take care of most of the admin.

Moving from sole trader status to Director of a Limited Company can be a big decision. For more information, or to make the switch, speak to one of our specialist contractor accountants on 01442 795 100 or email sophie.lewis@dolanaccountancy.com.