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Limited Company vs Sole Trader Calculator

Calculate how much tax you will pay on your profits as a sole trader vs limited company.

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How this calculator works?
  • Use this calculator to compare your take-home income if you are operating as a sole trader or as a limited company. 
  • Enter your annual turnover excluding VAT and expenses.
  • The calculator will calculate your estimated take-home income under both options.
  • The calculator assumes that you are eligible to claim Personal allowance and will be drawing tax efficient salaries from your company.

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Limited Company vs Sole Trader Calculator (Guide)

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What is a sole trader?

A sole trader runs the business by themselves. Unlike other types of businesses, a sole trader does not have any separate legal identity from the company.

As the business owner, they receive all the profits accrued and incur all the losses and costs associated with running the business. They usually operate all the business activities themselves, like providing services or selling products, regulating all the assets, recording documents, and handling other necessary details.

How to register as a sole trader in the UK?

Registering as a sole trader in the UK is simpler than any other business. You can register for a business account on gov.uk.

A sole proprietor is great for anyone starting in the business world. It is a good option for anyone receiving payment for providing services. You must also register as a sole trader if you produce and sell goods for a profit or receive commissions from your sales.

Now that you have prepared for registration, notify the HMRC of your intention to establish a sole trader outfit. For those who have filed returns, you require your 10-digit Unique Taxpayer Reference (UTR) for registration.

What is a limited company?

It is a business structure that is a separate legal entity from the individuals running it (i.e. the company directors).

The essential advantage of this is that a business has limited liability. If your company fails or is sued, your liability is limited to the face value of your share.

Beyond that, your personal assets are usually protected.

A limited company must be registered with Companies House. It must have one or more directors and its bank account(s). Like sole traders, a company pays its taxes.

You can calculate your corporate tax liability using the UK limited company tax calculator.

Can I set up a limited company on my own?

You can establish a business where you serve as the sole employee and director. Most contractors decide to operate as companies since doing so lowers the possibility that their clients will be required to consider them as employees for tax and legal reasons.

It also prevents contractors from severe personal losses if customers sue them.

What are the types of limited companies?

The large majority of limited companies are private firms limited by shares. This is a non-public firm whose ownership is structured through shares (even if it is just a single share owned by a sole director-shareholder).

After taxes, this kind of business can keep its profits and distribute them to shareholders (e.g. via dividend payments).

Other types of limited companies include:

  • Private firms limited by guarantee – these are usually not-for-profit organisations. Rather than having shareholders, this type of organisation is run by guarantors whose liability stretches to a 'guaranteed amount'. Any profits are invested back into the firm.
  • Public limited companies – are similar to privately held companies limited by shares. Still, they must have a minimal allotted share capital of £50,000 (of which a minimum of 25% should be fully paid up before starting a business).
    They can sell their shares to the general public (e.g. on the share market).

Self-employed vs limited company tax calculator

Determine how much tax you'll pay on your profits as a limited company vs sole trader.

Calculating your after-tax profits can assist in deciding whether setting up a limited company is tax efficient.

Enter your annual profits to see how much money you'll save by creating a limited company if you're already a sole trader or vice versa.

This corporation tax calculator includes the following assumptions:

  • The information is for the entire fiscal year.
  • It does not consider any group reliefs or group tax-saving strategies.
  • You do not have any other sources of income
  • You are entitled to a personal allowance

How to use the sole trader vs limited company tax calculator?

This corporation tax calculator can evaluate your take-home income if you're a sole trader or a limited company.

  • Enter your annual revenue, excluding VAT and other expenses.
  • Under both instances, the calculator will evaluate your expected take-home income.
  • The calculator implies that you are entitled to Personal Allowance and that your firm will pay you a tax-efficient salary.

When should you change from sole trader to limited company?

Being a sole trader is an excellent approach to testing, validating, and improving your business strategy. You decide everything without consulting other directors or stockholders, and there are no registration fees and very few administrative costs.

You are personally liable for the company debts; however, you pay income tax on your profits rather than corporation tax. This means that when your turnover rises, it can be more beneficial to create a private limited company.

By forming a corporation, you can access more ways of funding for your business. You cannot get private equity funding as a sole trader, but you can take out business loans from banks (i.e. selling shares in your business). With a limited company, you can do either or both.

Tax differences between sole traders and limited companies

When deciding sole trader vs limited company, the type and amount of tax you must pay will likely factor into your thinking.

Generally speaking, a sole trader pays income tax on the profits of their company, while a freelancer or contractor who operates through a limited company will pay corporation tax on the company profits and income tax on any wage or dividends received from the business.

Sole trader vs limited company pensions

Paying into a pension is an excellent method to save for retirement – it also reduces your tax bill. While sole traders can only pay into a personal pension (because their company isn't incorporated), limited company owners have more options.

In addition to a personal pension, business owners may establish a workplace pension plan and make payments more tax-efficiently.

Main benefits of using a sole trader vs a limited company

  • A sole proprietor is not required to have accounts, even though you might require accounts for things like mortgages. A limited company must prepare and submit yearly accounts to the Companies House. Along with other company information, these are accessible to the public for review. A small business plans to make its profit and loss statement public.
  • A sole proprietor does not have to comply with Company Law. Directors are personally subject to corporate rules. Directors who fail to comply with the law are subject to fines and charges. Sole traders can stop trading and contact HMRC, whereas it is more difficult to wind up a corporation.
  • As a sole proprietor, you often pay slightly lower accountancy fees. Due to the amount of paperwork involved, limited companies typically have higher accounting expenses.
  • Sole proprietors can reduce their tax burden by offsetting losses against other types of income, such as employment income. A limited company's losses cannot be adjusted against an owner's other income. However, you can save tax by offsetting the losses against future or past profits.

Can I change from being a sole trader to a limited company?

Being a sole trader is an attractive choice for many small business owners and self-employed individuals establishing their ventures because it's the simplest business structure.

However, there may come a time when you determine that being a limited corporation is preferable, and switching over is possible.

You may switch your business's legal structure to a limited corporation for several reasons. They consist of:

  • Your profits are rising, and you want to reduce your tax burden.
  • You're raising funds for your business.
  • You want to improve your company's reputation and perception among current and potential clients.
  • You desire to hire new talent.

Difference between a sole trader and a limited company

S. No. Sole traderLimited company
1.Business?You are the businessThe business is a separate legal entity.
2.OwnerYou are the ownerYou are a shareholder, holding all or a proportion of the share capital.
3.ManagementYou are the manager or proprietorYou serve the company as its director or employee.
4.Legal disputeYou will be sued personally.The company will be sued. Rarely are directors sued personally for a company's wrongdoing except for fraud, corporate manslaughter, etc.
5.InsolvencyPersonal liability for business debts.As a shareholder, your liability is limited to the amount paid on your shares.
6.FundraisingDifficultEasier. You can use schemes like EIS/ SEIS to attract UK investors
7.Employment statusSelf-employed; you cannot be your own employee.A director, by default, is not an employee in terms of employment law.
8.TaxIncome tax on business profits and Class 2 & 4 NIC.Corporate tax on business profits. Corporation tax rates are lower than higher rates of Income Tax. Employees and office holders are subject to PAYE and NICs on their earnings from employment, and many benefits attract income tax too. Shareholders pay dividend tax. When IR35 and the Managed Service Company provisions apply, the company must deduct PAYE and NICs on its income.
9.LossesYou can offset your trading losses against your other income.Can offset trading losses against its other income but not against the personal income of shareholders.
10.Profit extractionDrawingsYou pay dividend tax and PAYE on any salaries.
11.Personal BorrowingPermittedLimited borrowing by Directors is permitted, but exceeding this can attract tax at 33.75%.
12.PensionYou can only have a Personal Pension.Company schemes may be far more generous regarding benefits and limits than Personal Pensions. Contributions to pensions are generally tax deductible.
13.AccountsSimpler requirements- self-assessment return only.iXBRL tagged Annual accounts, iXBRL tagged corporation tax returns and confirmation statement.
14.Business salesCapital gains taxThe company does not pay any tax. You can claim entrepreneurial tax relief.
15.DeathAt death, your business dies, too, unless you pass all or part of it down to the next generation.When you die, the company lives on as it is a separate legal entity.

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Limited Company vs Sole Trader Calculator