The Jonathan Ford & Co Advent Calendar – Day 15
Over the course of the festive season we’ll be bringing you an advent calendar’s worth of tax and financial tips. Some of them might even be a little Christmassy! It’s 15 December so that can mean only one thing: it’s day 15 of advent. Today we focus on becoming a limited company.
Trading as a limited company
Being a sole trader can come with some benefits, in particular during the early years when the business is finding its feet. You only need basic accounting of income and expenditure and you only need to submit one tax return each year (although quarterly submissions loom on the Making Tax Digital horizon).
Unincorporated businesses are not particularly tax efficient, though. A sole trader with profits of £40,000 will shave nearly £1,300 off their tax bill if they trade as a limited company.
The tax savings become even more stark if profits are above the basic rate tax bracket. A sole trader with profits of £60,000 will save over £3,300 in tax by trading as a limited company. For every £10,000 of profit over £60,000 they would save a whopping £2,300 by simply being able to leave the cash in the company.
This doesn’t even include the potential preservation of child benefit claims and reduced student loan repayments.
There are also non-tax benefits of trading as a limited company, namely:
- If you are sued then your personal assets are protected
- A company can look more professional
- A company can make your business look bigger than it is
- Some businesses will only deal with suppliers that are limited companies
It would, however, be remiss of us not to highlight some potential downsides of limited companies:
- Accounting systems need to be more robust
- Taking cash from the business needs to be more formal
- There is more admin burden, with more documents requiring submission
- Accountancy fees are higher
We can help with all of that, of course. Well, except for the accountancy fees.
The new year should herald at least a review of whether a limited company is suitable for you, in particular if business is gaining traction or you operate in a litigious sector.
