Self Employment Vs Limited Company
Published 22 March 2010
Archived article from 2010. Rates, thresholds and rules may have changed since then. Ask us for the current position before you act on it.
Minimising the overall tax is a key aim for all businesses.
Despite the Government's attempts to increase the corporation tax assessed on small limited companies, the tax benefits of trading through a limited company still remain attractive for businesses with modest profits.
The basis of taxing small company profits over 2009/2010:
1 Apr 2009 to 31 Mar 2010 - Profits up to £300,000 taxed @ 21%
| Annual Profits | ||||
| £15,000 | £30,000 | £60,000 | £100,000 | |
| Sole Trader | ||||
| National Insurance | ||||
| - Class 2 | 125 | 125 | 125 | 125 |
| - Class 4 | 743 | 1,943 | 3,214 | 3,614 |
| Income Tax | ||||
| - 0% | 0 | 0 | 0 | 0 |
| - 20% | 1,705 | 4,705 | 7,480 | 7,480 |
| - 40% | - | - | 6,450 | 22,450 |
| total | £2,573 | £6,773 | £17,269 | £33,669 |
| Limited Company | ||||
| Corporation Tax | ||||
| - 21% | 1,950 | 5,100 | 11,400 | 19,800 |
| Income Tax | ||||
| - 40% | - | - | 2,129 | 9,959 |
| total | £1,950 | £5,100 | £13,529 | £29,759 |
| potential tax saving: | £623 | £1,673 | £3,740 | £3,910 |
Remeber:
In the above comparison it is assumed company profits are extracted first by a salary of £5,715, with the remainder drawn as dividends from single company and proprietor receives no other taxable income.
As well as the amount of direct taxation due on profits, businesses should consider a number of further issues before deciding which of the two trading mediums is most appropriate:
If minimising the taxation on profits is a key concern, and these profits are modest, trading as a private limited company, as opposed to being a sole trader or partnership, is still an attractive option.
The decision of which trading medium to trade through should be based on many factors, and will usually require professional guidance.