The Prestige Business Management
Guide to Self-Employment versus Limited Company
In this guide to self-employment versus limited company we explain the differences between registering for self-employment, or a limited company, so you can select which is the right business model for your long term profitability.
You have two options for how to run a business in the UK, either self-employment or register a limited company (LTD). Self-employment means you will need to file an annual self assessment tax return. If you are based in the UK you will need to register as self-employed or incorporate as a limited company. If you are based outside of the UK, you may choose to register a UK limited company – so that you can receive payments within the UK, which is an option while living abroad.
It’s important to take sound financial advice. Contact Prestige Business Management for targeted guidance and information on anything in this guide. We are here to help and we pride ourselves on our communication and our straightforward guidance for start-ups and tailoring the most effective accounting for your business, for every stage of growth.
Our golden rule is to start simple. We suggest that as a start-up you opt for self-employment. A new business demands high energy and motivation from you. Therefore starting simply by registering for self-employment will allow you to start trading as swiftly as possible.
Prestige Business Management can guide you through the self-assessment process and provide fully automated accounts support in either Excel or QuickBooks, which is your choice. We provide full training on how to use QuickBooks to all our clients, plus a really cool receipt scanning app to help you keep on-top of your invoices, bills and receipts.
We can help you make sense of all this. Every new business owner deserves to follow their professional dreams. So you can get started with confidence.
Self-employment offers simple record keeping and cheaper accounting due to the reduction in general accountancy compliance. You can either use an online accounting program, like QuickBooks, or a simple excel spreadsheet template that we provide, to keep track of your income and expenses.
Using QuickBooks helps both self-employed and limited companies stay compliant in relation to the latest HMRC rules and guidelines. The software can monitor your finances and highlight compliance within the customised reports section.
Quickbooks is a world-leading accounting platform that can help you better manage your company’s finances and offer you great insights into how your business is doing at the click of a button.
As a self-employed individual you will need to file your self assessment tax return once a year, in the UK the tax year runs between 6th April and 5th April.
Following this period you have 10 months to get your records in order and file your self assessment tax return by the 31st January the following year.
You may also have to make a payment by the 31st January along with a potential deposit payment and a further deposit on the 31st July. Read more about deposit payments here.
Prestige Business Management loves nothing more than to take the headache out of it for you so you can concentrate on growing your business.
While your profit stays under £50,000 we suggest you stay self-employed. To calculate your profit you simply deduct your expenses from your income. Everything left over, is your total profit, which you declare to HMRC in your self assessment tax return. From this they will calculate how much tax you will need to pay for the year.
Self-assessment is a straightforward process and the team at Prestige Business Management can handle it all for you. The day to day running just requires a bit of record keeping making sure your books are up to date by the end of the financial year. If your profit is below £50,000 then you won’t save anything by registering a limited company. The advantage is mainly down to its simplicity in running your business, cheaper accountancy fees around £360 inc. VAT and once you pay the taxes the profit is all yours.
It is cheaper and simpler to be self-employed up until your profit reaches £50,000. Over and above this threshold, it will be more tax efficient to run your venture through a limited company. Once you get close to £50,000 in profit, we would open a limited company for you, so it’s ready to simply switch over to, when you need it.
Income tax goes up the more you earn which is why we suggest we keep an eye on your profit and switch to a limited company when you get close to the £50,000 profit mark to save you paying the higher rate. The percentage you pay in tax will be higher once you start earning over £50,000 in profit. Switching over to a limited company at that point is very easy.
The other main difference is that you have no real legal protection as an individual when trading under self-employment. Therefore if someone takes legal action against you, they are taking it out on you personally and all your personal assets are at risk. There is no limited liability like you would experience if you ran a limited company.
The expenses you can claim are governed by HMRC who place restrictions on what they consider to be legitimate “business expenses”. Utilising allowable expenses can give you greater tax efficiency. Our financial advisors are experts in tax efficiency and help you make the most profit out of your business.
To start with, keep records for all your expenses and income for 5 years. These can be kept digitally or on paper. At Prestige Business Management we maximise the use of technology, so alongside QuickBooks we use Receipt Bank. The biggest positive is that you can’t lose any receipts as the digitisation process and the cloud means you’ll always have access to them. This also responds to the demand for more businesses to provide an alternative to the paper receipts in the government’s strategy for making tax digital.
You’re the Boss
You ‘own’ the self-employment business because the business is you. There are no ‘officers’ or ‘shareholders’. You have total control over the ownership dynamics of the trading entity as an individually self-employed contractor or freelancer.
This means that you are personally liable in any legal proceedings and disputes if you are legally challenging, or being challenged legally. Unlike a limited company, which affords its directors with the limited liability protection measures, a self-employed business owner does not have those same levels of legal protection. You can take out specialist liability or indemnity assurance schemes, but you are still individually liable.
When you make a profit you have to pay tax, like a limited company. However, the big difference is the scale of the tax and how it is assigned. You will pay tax at a higher rate than a limited company because you will in fact be paying Income Tax and not Corporation Tax. This means you will have to pay tax along with National Insurance contributions (both class 2 and class 4). This means you could be paying more than a limited company with the same revenue stream as yourself. This is the tax-based drawback of self-employment.
You are liable for your losses and that there are caps on any relief you may claim on losses. Furthermore, your scope for offsetting your trading losses from self-employment isn’t as diverse as a limited liability company’s ability to offset losses.
Self-employment grants greater freedom to extract profits from your business without immediate taxable impact. The limited company structure means any withdrawals from the company must be distributed within strict frameworks, like dividends or benefits etc, but the self-employment is without organisational hindrance.
How to Register Self-Employment
Self-employment means you ‘work for yourself’. You are a business for all intents and purposes. It may not feel like it but once you grow and lease premises, hire staff and take out insurance protection, you’re operating just like any other business. This is why you need to make sure you register as accurately as possible.
Register online with HM Revenue & Customs. It is quick and easy. Once you’ve got an account with HMRC, you will receive your Unique Taxpayer Reference (UTR). Then you can access your account once you receive your activation post. This can take 10 working days to get to you via Royal Mail. Once you’re logged in, you are fully registered with HMRC and you can submit your tax returns. You also need to understand the ‘dos and don’ts’ involved in trading under a business name. However, Prestige Business Management can help you set-up and register with HMRC, allowing you to focus on running your business.
Our business finance specialists recommend that you set-up a separate bank account to help divide your own personal money from your day-to-day business account needs. Furthermore, you will need to think about how you intend to pay into a pension scheme and you might need to talk to your mortgage provider or landlord to ensure that you are allowed to run a business from your own home.
When your business starts to grow, it will become a ‘going concern’, then you can think about the next steps in your business’s evolution. However, there are benchmarks that will cause you to need to register. For example, if you earn more than £1,000 from self-employment work between April 6th 2018 and April 5th 2019 or you wish to claim state benefits or qualify for state benefits by paying the right Class 2 National Insurance contributions. Once you pass this benchmark you will need to register to stay compliant.
The first advantage is that non-UK residents are eligible to register a limited company in the UK. This offers the freedom to run your business from abroad whilst still benefiting from the tax advantages of a UK-based limited company. The other main advantage to registering a limited company is the savings in tax if you are earning over £50,000 in profit.
If you are currently self-employed, but approaching £50,000 in profit or even gone past it, then we could save you £1000’s in tax so call us right away about switching to a limited company. We are experts in tax efficiency and making your business more profitable with a quick and easy tune-up.
The main difference between registering a limited company and self-employment, is that a limited company is an entity in its own right. It is permanently based in the UK, it pays its own taxes, and can protect the company shareholders and managers from liability. An individual can own part or the whole limited company, but an individual is not the company. Ownership can be transferred, modified or sold as the shareholders see fit.
Ownership of a company is governed by its shareholders. This means that when a company is founded, shares are issued to the owners. These can then be transferred, additional shareholders can be added, and shares can be sold. A company pays its own tax called corporation tax and money taken out or paid to individuals is taxed separately on their personal income. So, we must take both limited company and personal tax into consideration.
A company’s year runs from the date it was formed and finishes on a month end, this will be slightly different in the first year of the company, but for every year after that it will finish on a month end. Nine months after the year end date is the deadline to file the accounts with Companies House and the Corporation Tax return with HMRC.
There are quite a few advantages to a limited company. Some apply to everyone and others vary depending on your personal circumstances.
The general advantages are:
A limited company is an entity in its own right; if someone tries to take you to court, they can only take the company to court and your personal assets will be protected.
Flat rate corporation tax makes it quick and easy to keep an eye on your potential tax bill.
Businesses earning over the £50,000 profit threshold, which are registered as a limited company will save paying the higher rate.
A limited company formed in the UK will always be based in the UK no matter where the directors or shareholders move to.
The UK has a lower rate of corporation tax than most other major European countries.
The main disadvantage is the demand for a higher degree of compliance with HMRC and Companies House. This level of compliance is a lot higher than that of a self-employed business. However, this is something we will handle on your behalf.
Prestige Business Management offers far more dynamic than a ‘one size fits all’ accounting package that you might find elsewhere. Whether you are just starting out, or you have had an active business for years, will give you a completely tailored service that focuses on you and takes into account your next steps and your business journey.
We will use our expertise to guide you in which tools will work best for your business in the current financial climate. We have a strong focus on the latest technologies, apps and software, to make your life easier and we have excellent communication, so you will always know exactly what is going on with your business.
Taxes – The Company
Corporation tax is paid by businesses in the UK, and is calculated on their annual profits, in a similar way to income tax for individuals. The corporation tax is a flat rate for all limited companies. Unlike individuals, companies don’t receive any kind of tax-free allowance, and therefore all profits are taxable. However, there are a number of expenses and deductions that can be claimed to reduce your bill. There are other taxes to take into consideration if you hire employees, which applies to self-employment and a limited company.
Taxes – The Individual
There are two main ways to take money out of a limited company as a shareholder, one is by being on the company payroll and the other is dividends. There is a little magic we can use when putting you through the company’s payroll, these allow us to pay you as if you were an employee without incurring any national insurance charges on the company or on you personally. Dividend payments is simply a share of the profit paid out to its shareholder in relation to the percentage of the company they own. This is also the main way you will take money out of the company as an owner and it’s taxed on your personal tax return.
You will need to keep records for all your business expenses and income for 6 years plus the current trading year, these can be kept digitally or on paper. As we have said in the self-employment section, the expenses you are allowed to claim are governed by HMRC who place restrictions on what they consider legitimate business expenses. We will go into more details about these shortly.
Limited Company as a Legal Entity
A Limited Liability Company has its own legal identity which is separate from its directors and shareholders – unless we are talking corporate manslaughter or serious criminality then a company director cannot be held personally responsible and therefore accountable for the company’s decision-based outcomes.
The company isn’t owned by you. Even if you founded the company, ownership is based on share ownership. You will own the proportion of the company that is connected to your share ownership capital rights. Therefore, if you sell off 10% or 49%, whatever remains is your stake in the company.
You are not “your own boss” in a limited company. You are a company officer, i.e. a director, within the company and you report to the shareholders of the company whose interests you primarily manage and protect. Furthermore, an officer of the company, as in a Managing Director, isn’t necessarily linked to employment law norms. You are not automatically entitled to employee status and as such benefits like the National Minimum Wage or government benefits like Tax Credits are not automatic ‘rights’.
Legal disputes, in the context of a Limited Liability Company, means the company as an entity will be a legal party in any legal proceedings under English and Welsh business law. There are limitations to the ‘liability’, for example if the directors perpetrate a fraud or breach health and safety law leading to manslaughter, the individual directors are then personally liable.
In a limited company, the company is liable to pay tax on any and all taxable profits. This is the ‘unique selling proposition’ for limited company status. The corporation tax rates are a lot lower than individual personal tax rates. However, officers and employees of the company are subject to PAYE and NICs on all income. Furthermore, shareholders are also liable for dividend tax on any and all income derived from the shareholding.
When a company makes an annual loss, the company can “offset” the loss against other incomes generated by the business. The loss is a ‘company’ loss and does not equate to a ‘personal’ loss in terms of your own personal finances.
As a company director and a shareholder, you will be paid a salary in order to avoid PAYE and NIC tax on payroll and the dividend would be paid on-top of your salary. For it to be classified as a dividend and not a loan (for example) the sum would need to be agreed by an official board meeting with minutes taken and thereafter the sums would be allocated based on the share ownership structure.
Self-Employment Versus Limited Company
You need to understand the type of client / customer you will be targeting to understand which structure will suit your business. Considering liability is the first step in deciding the right pathway. Some argue that registering as a limited company affords small businesses with status and while some big clients won’t work with self-employed traders and freelancers, but it depends on the industry and your professional relationships. We can offer you unbiased advice for the best outcomes for your business. .
Self-employment carries the risk that your individual financial affairs are not separate from your business activities. If a client passes on risk by failing to pay an invoice on time or failing to deliver what is agreed, this could impact you financially which could result in personal loss. HMRC and the wider financial world will view financial affairs as a whole. This means your assets include your home and your car, so these are at risk if you fail to repay a debt for your business.
Registering a limited company comes with limited liability. This means your own finances and the company’s finances are separated. An evaluation of your business, and your client type will help you understand what business model you should adopt.
The biggest difference between self-employment and limited company status surrounds the savings efficiencies that result in terms of tax and national insurance payments once your business profits pass £50,000. If your business profits are under £50,000, then limited company status would in fact hinder your ability to legally reduce your tax bill.
All business decisions should be taken in full view of the risks and your position in the financial ecology, so engage the services of a good accounting specialist to make sure you have the full picture. This will be a uniquely rewarding partnership in terms of how your business will grow and become more profitable in the future.
Prestige Business Management understands how every business is unique and how self-employment vs limited company status will benefit sustainable growth for each type of business. We can help make sense of all this. All you need to do is get in contact for help and guidance, call, email or message us to get started, whichever you prefer.
CEO Sam Bondarenko started his accounting firm with the aim of accounting for modern business: Fast, simple and responsive. Prestige Business Management harnesses the power of the latest technology for modern accounting to make sure your business is running smoothly.
We get to know your business and discuss with you which services you do and don’t need including what you will need in the near future. We’ll set you up with all the software you need, uniquely selected with you. We will even arrange any helpful training or refresher info that might be useful. Once we have transferred the details we need from yourself or a previous accountant, we will get on working in the background, keeping your business compliant and running like clockwork.
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Prestige Business Management provides custom prices for each of our clients depending on the services and level of service they require. We work openly and transparently. This is one of the reasons that we don’t offer flat rates. There is no one size fits all accounting package. What we do is get to know you and look at how you are working and where you want to get to and we design your package and pathway with you. So you will never be paying for a service that you don’t need or doesn’t suit you. Whether it’s bookkeeping and compliance or taking the whole thing off your hands leaving you free to get on with what you know best, it’s entirely up to you.
Prestige Business Management Can Help You and Your Business
At Prestige Business Management we can help you understand the best solutions for the success of your business. Find out what we can do for you. Call us today on 0203 773 2927.