Self Employed to Limited Company
A quick guide to going Limited
Have you been advised that working through a limited company may be more beneficial to you? Our quick guide below will show you just how easy it is making the move to limited.
Forming your limited company just takes a few minutes on the Easy website. Our quick and easy company formation service costs £125 + VAT and your company will be set up on the same working day. Included in our fixed fee solution is the setting up of your company bank accountant and registration of your company for VAT and PAYE.
To check if your chosen company name is avaliable, please use our simple company name checking service. Or if you would like some advice in choosing your name, visit our choosing a limited company name page.
Ideally at this point you then want to appoint an accountant, who can advise you on the most tax efficient way to work through your limited company. Please visit our what will an accountant do for me page for more information, call 0500 234 111 or email email@example.com to speak to one of our firendly accountants.
Making the move from self employed to limited
If you are having trouble working out whether forming a limited company is the right thing for you, then there are a few things to think about that should help you to reach a decision:
- Do you expect to make more than £25,000 profit a year?
- Are you likely to incurr many expenses?
- Will you be doing all your own paperwork and admin?
- Is your image as a company likely to be an important part of your success?
- Do you have a pension or retirement plan?
- Are your earnings likely to fluctuate significantly from year to year?
Thinking about all these things can help you to decide what would be the best for your business. If you are only considering working for yourself on a single project, only in your spare time or whilst looking for an employed role, then keeping things simple could be the best option for you. However, if you are committed to running your business and can spare the time for a little extra admin, then going limited could offer you a range of benefits.
The advantages and disadvantages of being a sole trader
Any freelancer will know that being your own boss has its perks, but also a few downsides. These include the fact that you are responsible for every aspect of running your business, such as marketing, invoicing, setting your rates and managing your workload. As a sole trader you are responsible for your own taxes, meaning that you have to keep records and submit details to HMRC once a year.
However, setting yourself up as self employed is a relatively simple process – all you need to do is get in touch with HM Revenue and Customs and let them know that you are intending to work as a freelancer and you are official. They will send you information about what you need to do when it comes to taxation, and they also run a range of courses which offer help and support to those who are running their own business. You can also close your business easily if you are self employed, so if you aren’t sure about your long-term plans and want to keep your options open then self employment is a more flexible choice.
The advantages and disadvantages of going limited
If you do decide to trade as a limited company, then the process for registering your business is a little more complex, but can still be completed quickly and easily if you have done the relevant research. Setting up your business will incur some costs, but these could be as low as £125 for a package which offers you a full range of services including advice on how to maximise your profits and minimise your outgoings, helping you to set up your business bank account and registering your business for PAYE and National Insurance which can take a signiciant amount of time to complete.
One of the main considerations when deciding whether to trade as a limited company is your personal preference – you have to feel comfortable with your decision and be comfortable with the level of input required, especially if you will be managing all your own administration yourself.
The primary reasons that most people identify as contributing to the decision to trade as a limited company are to benefit from tax efficiencies which are not available to sole traders, and to limit your liabilities. You can take advantage of a number of other opportunities to maximise your income, especially if your profit is more than £25,000.
Tax efficiencies are particularly important to anyone who expects their income to fluctuate significantly from one year to the next. Running a limited company will allow you to arrange your tax so that you can balance out your tax liabilities from year to year. For example, if you are likely to earn £55,000 in one year, but only £20,000 the next then you can leave a sum of money in the business from the first year so that you do not have to pay the higher rate of tax on the higher sum and use that money in the second year to subsidise your lower earnings. This means that instead of bouncing up and down between tax brackets, you can instead pay your tax at the rate of your average earnings.
As a sole trader, you are obliged to pay tax on your profits are as you earn them, meaning that you would be paying tax at the higher rate for the first year and then at the lower rate for the second.
You can also reduce your National Insurance bill as a limited company: sole traders pay their National Insurance contributions based on their declared profits, whereas someone running a limited company can pay themselves a salary from their business and pay National Insurance only on that sum. You can leave any excess in the business and then, if you need to, withdraw sums from the business if you need to in the form of dividends. National Insurance is not payable on a business’s company profits when paid out in this way, so you could save money on your yearly bills and plan when you might want to withdraw money from the business in order to grow your business at the pace and rate that works for you.
As a limited company, you are also able to benefit from differences in how you report and offset expenses compared to operating as a sole trader. When you are self employed, calculating your expenses can be as simple as keeping track of all your business spending, adding up the total and including this figure on your Self Assesment tax return when you submit it.
Claiming expenses as a limited company is a little different and you may need to do a little more work than you would have to as a sole trader, but this can be more than offset by the savings you could make. You still need to keep track of all your business receipts and have a record of all your expenses, but as a limited company you would only need to pay corporation tax on the profits, which is levied at a rate of 20%. You may still have a personal tax bill, but your business will only be taxed on your profits, although it is always worth contacting an accountant to help ensure that you are optimising your profits whilst paying tax at the appropriate rate.
Expenses are defined as business costs, and one of the main differences is how you claim for running a car, if you use one in the course of your work. A sole trader can claim back a proportion of the costs of running their vehicle, so if half of their journeys are made in the course of their business, then half the costs of running a car can be claimed back as a business expense.
As the director of a limited company, it is often more cost effective to claim by the mile rather than purchasing a car for company use. You will need to keep records of how far you travel in the course of your business and you can claim back 45p per mile for the first 10,000 miles travelled in any given year and 25p per mile for every mile after that. There are a range of other allowable expenses that can be claimed back including:
- Rent payments made on business premises
- Utility bills for business premises
- The cost of any stock your business purchases for resale
- Spending on equipment or tools needed in the course of your business
- Marketing and advertising your business
- Telephone use for business purposes
- Bank charges and payments associated with running your business bank account
- Incidental costs of running a business such as postage, stationery, trade or industry magazines or books
For more detailed information as to whether specific expenses relating to your business can be claimed, it is always best to seek the assistance of an accountant. Some of the rules regarding expenses are complex and it can be hard to work out how they apply to you, so always make sure you take expert advice on any areas of uncertainty. For instance, you cannot claim for parking fines or speeding fines even if they were incurred in the course of doing business, and a simple error such as including them on your tax return could turn out to be a costly mistake.
Some of the other advantages of trading as a limited company are in the perception that others have of limited companies. Some business will only trade with other limited companies, meaning that failing to register as a limited company could actually limit the amount of work available to you. This is more common in certain sectors than others, but depending on the industry in which you work, choosing not to trade as a limited company could actually exclude you from even bidding on certain contracts. For companies who deal direct with their customers, being a limited company can convey a certain degree of confidence in your reliability and the size of your business. If you think this is likely to impact the success of your business then it is definitely worth considering going limited as it could improve the viability of your business and offer benefits in the long-term.
If your business is likely to make less than £25,000 profit a year, then it may not be worth the extra administration involved in running it as a limited company unless there are other advantages to you of doing so. Whilst setting up a limited company may not cost much, you could also attract higher fees from an accountant and you have to file your accounts with both Companies House and HMRC every year although your accountant will usually do this for you. If you find that you are short on time anyway, and don’t have any capacity to take on extra record keeping or admin work, then any extra work may seem like an unnecessarily onerous commitment. Talking your options through with an accountant could help you to make your decision, so if you really aren’t sure which route to take then some professional advice could help you to make that decision.
If you would like some more advice on making the move from self employed to limited, contact us on 0500 234111 / 01442 275767 or email firstname.lastname@example.org.