Limited Company vs Sole Trader Calculator

Self-employed vs limited company tax calculator

This calculator compares your take-home earnings if you're a sole trader or a limited company.

By calculating annual profits, you can determine whether starting a limited company or a sole trader is more tax efficient.

Enter your annual profits to check how much money you'll save with a limited company if you're already a sole trader.

What is a limited company?

A limited company is a corporate legal structure formed and registered with Companies House, the UK’s Registrar of Companies, using the incorporation procedure.

A limited company is a type of firm that is legally distinct from its owners (usually shareholders) and managers (formally called directors).

How to set up a limited company?

To start a limited business, you must first decide whether you want to be a Public Limited Company (PLC) or a Private Limited Company (LTD). PLCs must have a minimum of two shareholders, two directors, a qualified company secretary, and share capital of £50,000.

As a result, small enterprises, contractors, and freelancers frequently form private limited companies. Now you must choose a company name; unlike starting a sole trader business, your company name must be unique.

You can register your firm for corporation tax by registering your company name with the Company House. Following registration, you’ll receive a certificate of incorporation, including the date of incorporation, the company number, and proof that your business is authorised.

What is a Sole Trader?

Someone who is self-employed and the sole owner of their business is a sole trader. The term is used to describe the type of business structure you use.

Because you (the business owner) and the company are considered one legal entity, you are entitled to all profits after taxes as a sole trader. You can hire employees, but you must register as a self-employed with HMRC to pay tax via the self-assessment process.

Since it is the simplest business form, working as a sole trader is the most popular option for self-employed professionals in the UK.

You don’t need to register with Companies House. As a sole trader, there are no directors, shareholders, or partners for your firm. You have complete control over the operation and direction of your company. Of course, there are rules to follow and responsibilities to fulfil.

How to register as a sole trader?

Sole traders are the most common business form since they are simple to set up.

To be a sole trader, you must have a National Insurance number and register for self-assessment with HMRC if you make more than £1,000 in a tax year. That is, from April 6 to April 5 the following year.

You’ll have the option of trading under your name or a business name when naming your business; remember that when it comes to naming your sole trader business, other businesses can do so since both are entirely legal.

So choose your name carefully, mainly because a mistake could lead to your business being associated with a negative reputation or poor service.

How do you change from a sole trader to a limited company?

Most people begin as sole traders and then expand into a limited company once they have a solid customer base and a consistent income. The transition from a sole trader to a limited corporation is straightforward.

Limited Company vs Sole Trader

The most significant difference between a limited company and a sole trader is that a sole trader is owned and controlled by a single individual with unlimited personal liability for the business. In contrast, a limited company's ownership is divided into equal shares.

A limited company's shareholders have limited liability for the company, which might also mean less personal financial risk when starting a business as a limited company.

Finally, you must assess the positives and negatives of operating as a sole trader vs a limited company, as the structure you choose might affect everything from profits to paperwork. Don't make hasty decisions and consult an accountant if you're unsure, as their tax knowledge is often valuable.

Finally, you must assess the positives and negatives of operating as a sole trader vs a limited company, as the structure you choose might affect everything from profits to paperwork. Don’t make hasty decisions and consult an accountant if you’re unsure, as their tax knowledge and experience are valuable.

How does a Limited company over a Sole trader help you?

Your chosen company name is legally protected after registering it as a limited company. No one else can use it. If you wait much longer to register your business, you risk losing the name you want.

If a non-limited company fails, personal assets may be in danger, but this is not the case with a limited corporation. As a shareholder, you cannot be held personally liable for the liabilities of a company; hence, your assets are safe. It means your assets are not at risk; you only risk losing the money you invested in the company.

Furthermore, limited firms will be more tax-efficient than sole traders, as they will pay corporation tax on profits rather than income tax. It provides a more favourable tax rate, making incorporating a limited corporation more profitable.

They can claim a more excellent range of relief and tax-deductible charges against profits.