Going limited
7 min read
Short reads on tax and running a business
The answer is almost never about prestige and rarely about tax alone. It comes down to profit level, risk and how much admin you are willing to take on.
What the two actually are
As a sole trader, you and the business are the same thing. The profit is your income, you pay tax on all of it through self assessment, and any debt the business has is your debt.
A limited company is a separate legal person. It owns its money, it files its own accounts and pays its own corporation tax, and you take money out as a mix of salary and dividends. That separation is the whole point, and it is also where the extra admin comes from.
Where the maths changes
The saving comes from taking part of your income as dividends rather than all of it as trading profit. That gap only becomes meaningful once profit is comfortably into the fifties, because a company costs more to run.
“If the tax saving is under a thousand a year, the extra admin will cost you more in attention than it saves you in money.”
The admin you take on
This is the part people underestimate. A sole trader files one return a year. A company director signs up for considerably more.
Annual accounts filed at Companies House
A corporation tax return, separate from your personal one
A confirmation statement every year
Payroll if you take a salary, which most directors do
Your own self assessment on top, covering dividends
Your name, the company address and a rough idea of your shareholding also become public. For most people that is fine. For some it is the deciding factor.
Risk and who you work with
Limited liability is real and it matters if you sign contracts with meaningful exposure, hold client money, or take on staff. If you are a freelancer invoicing three friendly clients for design work, it is less of a factor than the tax question.
Some larger clients and agencies will only contract with a limited company. Ask before you decide.
How to decide, and when
Look at it once a year, not once a month. The natural point is just after your year end, when you have twelve real months of profit to look at rather than a forecast.
Incorporating is quick and cheap. Unwinding a company you did not need is neither, so the honest advice is to wait until the numbers clearly say yes rather than incorporating in case they might.
