Will your work expose your business to risk? Call us on:. Advantages and disadvantages of moving from self-employed to limited Although there are many advantages to working through your own limited company as opposed to being self-employed, as with most things, there are both pros and cons to consider for both options.
Self-employed and limited company tax As a self-employed individual, both your business and personal tax affairs are seen as one, meaning that you as an individual are indistinguishable from your business as far as HMRC are concerned.
What are my tax responsibilities as a limited company director? In order to take advantage of the tax benefits of trading as a limited company, you can choose to pay yourself a relatively low salary and leave the rest of your profits in the business. This will reduce your PAYE tax liability and your National Insurance Contributions, and you can still pay yourself additional sums in the form of dividends, which do not attract National Insurance.
This will leave you with more of your hard-earned money. Claiming expenses through your company Whether you trade as a self-employed individual or through a limited company, you are able to claim the costs associated with your business against your income to calculate your profits.
Planning to start contracting through a limited company? Form your limited company today. So, all contracts will be between them and you. Insurances for example will be between the insurance company and you.
When you trade through a Limited Company, your clients will be working with the Limited Company. Contracts should be between them and your Limited Company.
If you purchase insurance, then it should be the Limited Company who is insured and not you. That is why your house is safe. Being self employed means that you will only need to deal with HMRC, and the relationship is likely to be very taxed based. Companies House will be interested in whether your Limited Company is trading, if it is solvent can pay its debts , and who the directors and shareholders are.
If you are self-employed, you will need to submit a self-assessment tax return by the 31 January after the end of the tax year.
Your Limited Company will need to submit its own company tax return and accounts to HMRC as well as a shorter set of accounts to Companies House both within nine months of its year end.
As a Director, if your own income will give rise to a tax liability, you will need to complete a self-assessment tax return as well. The tax points for a self-assessment are 31 January and if you have a payment on account, the second one will be due by 31 July. You can read more about payments on account here if you wish. As your Limited Company will have to complete its own company tax return, it should come as no surprise that it will also have its own tax liability.
The Limited Company will pay corporation tax, and this will be due nine months after its financial year end. If you are self-employed, you complete your self-assessment tax return and tell HMRC what profit you have made during that tax year and then you pay tax on this profit. You are taxed on your profits. Selling the business When the business or the assets used in it are sold, there is a double tax charge on shareholders.
It may often be more efficient to sell the shares in a company, rather than its trade or business or individual assets. Company shares can be gifted. Death When you die your business ceases.
You can pass all or part of it down to the next generation. In a partnership you can pass on your share of the partnership. Death When you die the company lives on: it is a separate legal entity. Paying yourself You can withdraw any amount of profits, but it is not classed as remuneration as you are not an employee. Paying a Salary to a spouse or family members must be commercially justified to be allowable for tax purposes.
Paying a salary to a spouse or family members must be commercially justified to be allowable for tax purposes. See Tax planning for directors.
Expenses in general You obtain tax relief for expenses that are incurred Wholly and exclusively for the purposes of the trade. If you can identify a proportion of an expense that relates to business you can claim the same proportion against tax.
An adjustment must be made for tax to add back the proportion of any expense that relates to 'private use'. Most commonly private use will be in respect of your use of telephone or power, own consumption of goods and motor running expenses. See What expenses can I claim? Expenses in general The company obtains tax relief for its expenses if they are incurred wholly and exclusively for the purposes of the trade. If a director incurs private expenses through the company, they may be treated as earnings.
If he is a shareholder the amounts are treated as distributions. Cars and fuel A sole trader or partner can claim capital allowances on a car, disallowing a proportion for private use. See Capital Allowances: Vehicles. Low-emission cars can be tax efficient for family members on the payroll. There is no adjustment for fuel benefit for you as a sole trader, you merely disallow a proportion of your fuel costs in relation to private use.
See Motor expenses self-employed. Cars and fuel The company obtains full capital allowances on cars, irrespective of any private use by employees.
Low emissions vehicle attract a low or zero benefit in kind tax charge. Low-emission cars can be a tax break for family members on the payroll. It is not tax efficient to provide petrol or diesel company car drivers with fuel for private use. Employers are permitted to reimburse company car drivers for business mileage but they must use special Employer's advisory rates. Mobile phones Mobile phones will be subject to private use so a tax add-back is expected on your tax return.
Only one per household. See Tax-free benefits and perks. Computers You can obtain capital allowances on a computer. An add-back of allowances will apply if there is substantial private use. Computers Providing you need to use one to perform your role your company can provide a computer without any tax consequences. Tax-free benefits and incentives These do not apply to the self-employed.
Tax-free benefits and incentives Many different benefits and employment incentives can be provided free of tax the company will obtain tax relief on the cost of providing these too. Company directors pay their own Income Tax based on their company salary. To take advantage of limited company tax benefits, some directors choose to pay themselves a lower salary so they can leave profits in their business rather than paying tax on them. This also lowers National Insurance contributions. Directors can still pay themselves cash in the form of dividends should they wish to.
It can be hard to choose whether or not to stay self-employed or to run your own limited company. Some deciding factors include whether you will incur large amounts of business expenses in the everyday running of your company.
While you can deduct expenses as a self-employed individual, companies can claim on a much wider range of expenses by comparison. Also, consider your future business plans for expansion, your tax plan and whether your finances and assets would be at risk if your business failed. If you founded a limited company, you'd no longer be financially liable and can take advantage of limited liability. Are you planning to start contracting as a limited company?
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