You might be asking “what is the right structure for starting a business?”, and unfortunately there is no set answer on what this is. Deciding what set up to have depends on your personal circumstances, estimated turnover, growth plans and long-term goals.

 

This guide has been designed to identify the differences between operating as a sole trader and a limited company, to allow you to make an informed decision on the best structure to use for your business.

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Operating as a Sole Trader​

When getting set up to operate as a sole trader, you will need to notify HMRC and request a personal Unique Taxpayer Reference (UTR) for tax filing. You will also need to consider if you need to register with HMRC for VAT or PAYE depending on your business plan and growth. Whether using a trading name or not, you don’t need to be publicly registered, giving you personal privacy.

 

As a sole trader, you and the business are “one”. This means any debts that the business cannot pay, you are still personally liable for, but also means that all profit you make during the tax year (6th April – 5th April), is your own. Although I would recommend having a separate bank account for business transactions, all the profit you make (gross income less allowable expenses) belongs to you, and this is what you will be taxed on.

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When it comes to fulfilling your filing obligations, you will need to prepare and file a Self Assessment Tax Return with HMRC by 31st January each year, and there is no requirement to have accounts prepared (however, these can come in handy if you’re looking to get finance, such as a mortgage or loan).

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Sole Trader Tax Rates – 2024/25 tax year:

Income Tax                            Class 4 NICs
£0 - £12,570    0%          0%    £0 - £12,570
£12,571 - £50,270    20%        6%    £12,571 - £50,270
£50,271 - £125,140    40%       2%    £50,271 - £125,140
Over £125,140    45%       2%    Over £125,140

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Please note, these figures are on the assumption that you have no other income outside of your sole trader business.

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Operating as a Limited Company​

When getting set up to operate as a limited company, you will need to register with Companies House (which includes registration for Corporation Tax with HMRC). This will include your name, registered office address, and your month and year of birth being available on the public register. As a director and/or shareholder of the company, you will also need to register with HMRC for personal tax and request a personal Unique Taxpayer Reference (UTR). Again, you will also need to consider if you need to register with HMRC for VAT or PAYE depending on your business plan and growth.

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A limited company is a separate legal entity to you as an individual. This means that all profit you make during your trading year, belongs to the company, but also means that any debts that cannot be paid, you personally are not liable for. This provides security against personal assets. The company will be taxed (via Corporation Tax) on profits made in the financial year at a rate between 19% and 25%.

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When it comes to fulfilling your tax obligations, you will need to prepare a set of accounts and a Corporation Tax Return, to be filed with Companies House and HMRC respectively, and you have 9 months from the financial year end to do this and pay any outstanding Corporation Tax. It is recommended that an accountant is hired for this, to ensure all available reliefs are applied and that the accounts are correctly prepared under the accruals basis.

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Any personal tax returns will still need to be filed, based on your personal income from 6th April – 5th April, and need to be filed by 31st January; however, if you have income elsewhere to your limited company, this is likely to be a more tax efficient way to increase your personal income.

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Still not sure which is best for your circumstances?                                                to discuss your situation and explore which may be better for you!