What are the key differences between self-employed vs limited company tax, and which is best for you?
One of the key decisions faced by anyone setting up a business is whether to operate as a self-employed individual or to set up a limited company.
Each structure has its own particular advantages and disadvantages, with a critical difference being how they are treated for tax purposes.
Self-employed vs limited company tax comparison
There are various differences between self-employed vs limited company tax requirements that can have a significant impact on the tax you pay as well as your business administration requirements.
- Self-employed taxation
Self-employed individuals are responsible for paying income tax and National Insurance (NI) on their profits.
Income tax is calculated based on total earnings minus allowable deductions and is subject to current income tax rates and thresholds.
NI contributions are also based on your profits, with different rates for Class 2 and Class 4 contributions.
Allowable business expenses will reduce taxable profits, and can include office rent, utilities, business travel, and professional fees.
It’s essential to ensures that any expenses that are claimed are genuinely incurred for business purposes.
- Limited company taxation
Limited companies are subject to a different tax structure.
They must pay corporation tax on their profits, which is currently set at 19 per cent for companies with taxable profits of up to £50,000, rising to 25 per cent to those with profits above £250,000.
This differs from income tax in that it’s applied to the profits of the company as a whole rather than an individual’s earnings.
A potential tax advantage of operating as a limited company is the ability to retain profits within the company.
This can allow for greater flexibility when it comes to managing tax liabilities.
Limited companies can also benefit from various tax reliefs and allowances, such as the annual investment allowance (AIA) for qualifying capital expenditure and research and development (R&D) tax credits.
What to consider?
There are several factors that you need to consider when deciding between being self-employed or forming a limited company.
As well as the different tax treatment, there are differences when it comes to administrative burden, as well as legal and financial liability.
Limited companies are required to file annual accounts with Companies House and ensure compliance with company law regulations.
Self-employed individuals have simpler administrative requirements and will need to maintain accurate records and file a self-assessment return.
Operating as a limited company does provide limited liability protection, meaning that the company’s directors and shareholders are not personally liable for the company’s debts and obligations.
Self-employed individuals are personally liable for any business debts.
Bespoke financial advice & tax planning from DAAFL
At DAAFL, our expert team can provide comprehensive tax advice and planning services to help you maximise your income whether you’re self-employed or running a limited company.
Our specialist small business tax services can reduce your tax burden through sensible business tax planning while freeing up your time to concentrate on core business activities.
Our experienced specialists enable you to take advantage of any allowances, develop tax efficiency, and take the hassle out of tax planning.
Contact us for further advice on maximising your tax allowances and ensuring tax efficiency.