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What to Opt: Limited Company or Self-Employed?

When setting up a limited company, there are a lot of choices to choose from whether to go self-employed or set up as a limited company. Every business- irrespective of the size, big or small must have a legal structure. Here we will be discussing about limited company and self-employed. Setting up either structure will bring its own benefits and drawbacks.  The choice you make here is vital as it affects your business, including legal and tax responsibilities.

Limited Company or Self-Employed?

Limited CompanySelf-Employed
A limited company is a type of business structure that has its own legal entity, separate from its owners.Self-employed individuals earn income by contracting with a trade or business directly. It is the simplest form of business structure.
Here, you have to file a tax return along with company accounts.Being self-employed means, you pay your taxes via self-assessment rather than via a PAYE.
To start a limited company, you need to register with the Companies House and appoint a director.As a self-employed you have to register with HMRC which can be done online. And thereafter, you will need to file an annual self-assessment tax return by the tax deadline which is 31st january each year.
The advantage here is that if the company gets into losses the company goes bankrupt and not the business owner.The advantage is that there is less hassle of filing tax and other documents.
The disadvantage of a limited company is that there is a lot of admin work, complex legal and reporting requirements.The Major disadvantage is that there is no legal distinction between you and your company and hence if the business fails, a self-employed is held responsible for debts.
It is difficult to take out money from the limited company.As you are the owner of the company, you can withdraw money anytime you require.
It is the most tax-efficient as they pay corporation tax on their profits.You need to pay Income tax on business profits.

Tax responsibility as a Limited company:

  • As a limited company you have to pay 19% Corporation Tax on your profits and company directors pay their own income tax on the salary they draw from the company.
  • In order to take advantage of the tax benefits of trading as a limited company, you can choose to pay yourself a 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.

If you are looking for help in setting up as a limited company or for which structure to choose, please feel free to get in touch with us. We recommend taking the expert advice of an accountant before rushing into any decision.

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