
Whether just starting out, or established sole trader, you may be wondering if limited company incorporation is right for you. The truth is, it depends on your circumstances and what you want to achieve with your business.
In years previous, limited company incorporation was often the clear-cut winner. Yet, given the various changes to taxation that we’re seeing, it’s no longer so straightforward.
In this article, we ask ‘is incorporation really worth it?’. We address some of the pros and cons and offer a comparison between tax and take-home for sole traders, and limited companies.
Sole trader vs. limited company
In the early days of your venture, operating as a sole trader often feels the appropriate choice. It carries less administrative responsibilities and lower set-up costs, but this structure can hinder long-term growth.
Additionally, sole traders are taxed on their profits as they arrive. This means that, should you have an unexpectedly good year, you could breach thresholds and cost yourself child benefit/higher tax rates. Alternately, in the following year, you may have unused allowances go to waste.
Limited company incorporation carries more involved administration, and higher set-up costs, but your business is deemed legally separate to the business owner/s. A limited company structure can also offer greater flexibility in respect of tax planning and profit extraction.
You and your business being separate entities affords greater protection for your own assets, but does mean that the company money is not strictly ‘your’ money.
April 2023 changes – impact on tax liabilities and take home
Confirmed during the Chancellor’s Autumn Statement, come April 2023 the following tax changes will take effect:
- Corporation Tax will increase from 19 per cent, to 25 per cent for companies with profits over £250,000. Marginal relief will be available for those with profits below this threshold, but exceeding £50,000.
- The additional rate threshold for 2023/24 is falling from £150,000 to £125,140.
- The Dividend Allowance for 2023/24 will fall from £2,000 to £1,000. It will fall again in April 2024, to £500. Excess dividends will be taxed at 8.75 per cent, 33.75 per cent or 39.35 per cent, depending on your tax band.
Currently, and looking toward April, net income at various profit levels will tend to favour sole traders. Where this isn’t true, a company director’s net income is likely only to be marginally greater (assuming sole director and total profit extraction).
That being said, incorporation should still be a serious consideration. Of course, it has legal advantages in respect of limited liability, but it also opens doors to opportunities for growth and succession planning. From a personal tax perspective, income smoothing becomes possible, and limited companies are often perceived better by investors and lenders, for example.
Furthermore, with a bit of forethought in respect of shareholders and profit extraction strategies, tax benefits can be realised.
Discuss your options with a professional
There is a lot to consider when choosing between self-employment or limited company incorporation. If you’re currently having the debate, the following Practical Guide to Running a Limited Company may be useful.
Our team can allay your concerns and bring your ambitions within reach. We will help you to make sound, informed decisions for the good of your enterprise and earnings potential.
To discuss your options with one of our professionals, start the conversation with us by visiting our website.