What are the differences between Sole Trader and Limited Company Tax?

by | Mar 14, 2023

“What are the differences between sole trader and limited company tax?” is one of the questions our tax experts are asked the most.

Choosing the right structure is one of the most important decisions a new business owner has to make – and there are several benefits and challenges, including the way you’ll pay tax, associated with both.

While setting up as a sole trader is more straightforward (less paperwork and admin), you might miss out on opportunities for business finance or tax reliefs. Limited companies, on the other hand, are more complicated (more paperwork and costs) to set up, but can come with real tax efficiencies.

What taxes do sole traders pay?

If you’re a sole trader, you’ll pay any tax you owe through income tax self-assessment at a rate of between 20-45%, depending on your earnings (over your personal allowance). You’ll have to:

  • register for self-assessment online
  • wait to receive your unique tax reference (UTR) number
  • pay income tax on your profits by completing a self-assessment tax return once a year.

It’s also wise to keep a record of any allowable business expenses throughout the year, and to use HMRC’s calculators to work out if you need to pay Class 2 or Class 4 National Insurance Contributions, too.

If, as a sole trader, your turnover reaches £85,000, you’ll have to register for VAT. And, if you make a profit by selling a business asset, you may have to pay capital gains tax.

What taxes do limited companies pay?

Unlike sole traders, limited companies pay corporation tax on their profits – at a current rate of 19%, rising to 25% for some companies from April 2023.

Taxable profits include any money you make from doing business (known as ‘trading profits’), investments, or selling assets for more than they cost (‘chargeable gains’).

Limited companies qualify for a wider range of allowances and tax-deductible expenses than sole traders, including schemes like Research & Development tax credits and creative industry tax relief.

What’s more, if you own a limited company, you can pay yourself however you like. Lots of owners choose to pay themselves a combination of dividends and salary; because dividends have a lower tax rate, it can be an efficient way to reduce the tax you pay.

These benefits come with obligations, though – as a limited company, you’ll have to:

  • register for corporation tax
  • keep annual accounting records (along with any business expenses)
  • file a corporation tax return each year.

Each limited company director will usually have to file a self-assessment tax return, too, and you’ll have to comply with Making Tax Digital, the Government scheme for bringing tax online.

Help with your business taxes

Whether you’re a sole trader or a limited company, the specific amounts of tax you pay will depend on your individual circumstances.

We can help you make the most of any available reliefs, exemptions, and allowances – as well as plan strategically for the future. Speak to our team about our tax services today.


Ready to connect?

If you’re curious about how we can help you, please reach out: our team is very keen to hear from you.

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