A Fylde coast solicitor has said that although the government might have cancelled its planned tax increase for the self-employed, the issue has again raised the question of whether sole trader or limited company is the best route.
Going solo is a brave step, particularly for anyone leaving a stable job, but the rewards are often worth it.
There are benefits in terms of flexible hours, freedom to choose who you work for and with, and often in earnings potential. But self-employment is a risk, there’s no sick or holiday pay, no support from a team.
Around 5.5 million people work for themselves in the UK, they include construction workers, management consultants, dog walkers, mobile hairdressers and TV presenters. The vast majority are sole traders, with the rest one-person incorporated, or limited, companies.
The distinction is often made in how they pay tax, with business profit usually dictating which is most advantageous. Sole trader status, with personal taxation and lower fees, is by far the most popular for those at the lower end. In a limited company, where the director takes a dividend, the treasury makes its money through corporation tax and less in personal tax and is favoured when earning more.
However, new increases in dividend tax and a reduction in corporation tax aim to align both options more closely, and with the taxes paid by PAYE employees – the choice becomes significantly less clear cut.
But it’s not all about tax, another key factor is liabilities when things go wrong. As a sole trader, you are the company and are therefore liable for debts and could become personally bankrupt, or sued in the event of a legal dispute. Incorporation limits your exposure to both as the company is a separate legal entity.
Some clients will only contract to a Ltd, as protection for themselves, so you would have no choice. It’s also more straightforward to employ people within the Ltd structure, sole traders are often advised to incorporate at that point anyway. It’s worth thinking long term at the outset and considering professional advice.