Business Structures Compared
Sole Trader
Simplest structure - you and your business are one entity
Pros
- Easy to set up
- Simple accounting
- Keep all profits
- Private finances
Cons
- Personal liability
- Pay Income Tax on profits
- Less tax-efficient at higher earnings
Limited Company
Separate legal entity - more complex but often more tax-efficient
Pros
- Limited liability
- Tax-efficient (salary + dividends)
- Professional image
- Corporation Tax at 19-25%
Cons
- More admin/accounting
- Public accounts
- Director responsibilities
- IR35 considerations
Tax Comparison: Sole Trader vs Limited
Approximate annual tax bill at different profit levels. Limited company assumes optimal salary + dividend strategy. Actual savings depend on individual circumstances.
| Annual Profit | Sole Trader Tax | Limited Company Tax | Annual Saving |
|---|---|---|---|
| £30,000 | £4,830 | £3,500 | £1,330 |
| £50,000 | £11,000 | £7,200 | £3,800 |
| £80,000 | £22,500 | £15,800 | £6,700 |
| £100,000 | £31,500 | £23,000 | £8,500 |
*Estimates only. Actual tax depends on expenses, pension contributions, and other factors. Seek professional advice.
Understanding IR35
IR35 is tax legislation targeting "disguised employment" - contractors who would be employees if not for their limited company. If caught by IR35, you pay tax as if employed.
Key IR35 Factors
- Control: Do they control how, when, where you work?
- Substitution: Can you send someone else to do the work?
- Mutuality: Is there an obligation to offer/accept work?
Optimal Salary + Dividend Strategy
Most limited company directors take a small salary plus dividends. This is typically the most tax-efficient approach:
Uses Personal Allowance, no employee NI, qualifies for State Pension
Tax-free dividends available to all shareholders
Much lower than 20% Income Tax + 8% NI on employment income
Related Calculators
Related Glossary Terms
Frequently Asked Questions
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