Should I become a limited company?

Basically, a limited company provides opportunities for saving tax but it involves a higher level of bureaucracy, which you must either undertake yourself or pay others to do so on your behalf. Limited liability might also be advisable if the business venture is particularly high risk.

Forming a limited company has a number of implications, particularly in terms of taxation of profits. There are a small number of ways you can take money out of a limited company – dividends out of profits, a salary which is subject to Pay As You Earn (PAYE) and National Insurance Contributions (NIC) or by repaying a directors loan account which is in credit.

A sole trader on the other hand can take money out of the business as frequently as they like, provided it does not leave the business short of funding.

The forms required will also be different. A limited company will be required to file a corporation tax return with HMRC and annual accounts in the proscribed legal format must be prepared and delivered to Companies House. The accounts filed must comply with the statutory requirements. You would need to be aware of the deadlines for completion and submission of the company’s returns to as there are penalties for late filing. A sole trader on the other hand needs to prepare the “Self Employment” return as part of their annual Tax Return. This requires a profit and loss account and balance sheet but if the turnover (sales) is less than £79,000 the requirements are simplified.

Finally, the payments of tax are different. Corporation Tax (for a company) is paid 9 months after the end of the financial year whereas payments of Income Tax and Class 4 National Insurance Contributions are made twice a year –on 31 July and 31st January, based on a payments on account system.

For example, for a self-employed person, an accounting year to 31 March 2014 forms the basis of the 2013/14 tax liability and you would make payments on account on 31 January 2015 and 31 July 2015 (based on the total payable directly for the previous year), with a balancing payment or repayment on 31 January 2016 (together with the payment on account for the year ended 31 March 2016). The balancing figure for 2014/15 is calculated after submission of the 2015 Tax Return which would include the self-assessment trading figures for the business to 31 March 2015. Basic Class 2 National Insurance contributions are paid monthly usually by direct debit.

Being a limited company has other advantages too. For example, it makes it easier to transfer a share of the business to a new investor. A limited company format is probably appropriate where a venture is high risk. 


No Very

Captcha Image