Sole Trader to Limited Company
1.
Tax/NI Savings
Incorporation of a business can yield tremendous tax/NIC savings for
a sole trader in the following ways:
 Lower Tax and National Insurance payments (see Table below)
 When a business is sold to a limited company this creates
goodwill and therefore any payments taken as loan payments
instead of dividends/salary hence will not be taxed
 More scope for tax planning if you do not take out any
dividends then you will not be taxed if income is less than the
threshold of £41,865 (2014/15). If profits fluctuate this gives
more scope of avoiding or lesser the charge of tax.
Furthermore if you in receipt of child benefits or tax credits
then you can adjust your yearly income so you are able to claim
the maximum amount.
 A non–earning Spouse can be given a upto 50% of the business
and take dividends which could avoid/lessen any tax on
dividends
 Can offset additional costs against profits. For example lunch
costs when out on site
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1.1 Tax/National Insurance Savings Table
Sole
Trader
Profit before
£20,000 £30,000 £40,000 £50,000 £60,000 £70,000 £80,000
tax & NI
Class 2 NIC
£143
£143
£143
£143
£143
£143
£143
Class NIC 4
£1,084 £1,984 £2,884 £3,052 £3,052 £3,052 £3,052
Additional
Class NIC 4
£163
£363
£563
£763
Tax 20%
£2,000 £4,000 £6,000 £8,000 £10,000 £12,000 £14,000
Tax 40%
£1,627 £3,627 £5,627 £7,627
TOTAL
TAX/NI
£3,227 £6,127 £9,027 £12,985 £17,185 £21,385 £25,585
Limited
Company
Profit before
tax & NI and
after Salary £10,000 £20,000 £30,000 £40,000
Salary
£10,000 £10,000 £10,000 £10,000
Total
£20,000 £30,000 £40,000 £50,000
Income
Corporation
Tax 20%
£2,000 £4,000 £6,000 £8,000
Tax on
Dividends
£0
£0
£0
£2,830
Employee
NIC*
£245
£245
£245
£245
TOTAL
TAX/NI
£2,245 £4,245 £6,245 £11,076
Savings
£982
£1,882
£2,782
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£1,909
£50,000 £60,000 £70,000
£10,000 £10,000 £10,000
£60,000 £70,000 £80,000
£10,000 £12,000 £14,000
£5,330
£7,830
£10,330
£245
£245
£245
£15,576 £20,076 £24,576
£1,609
£1,309
£1,009
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*2K employment allowance offset against Employers National
Insurance. Employee NIC is payable.
The greatest scope to save minimum amount of tax if your profits are
between the ranges of £20,000 - £41,865 even if you profits are
lower or higher than this bracket incorporation should still be
considered. These tax savings are the minimum and there is huge
potential to save more tax as described in points 2-5
There are other reasons beside Tax/NI that you could be benefit
from incorporation:
1.2 Advantages of incorporation
a)
Status
A limited company has status and a perception of scale. It gives
the business some credibility and to you as a director of a
limited company (looks good on a business card too).
We have spoken to other former sole traders and they have
seen an increase in business immediately following
incorporation. Clients seem to be more confident in dealing
with a limited company than a sole trader. Image and
perception is very important in business. Lenders also view
incorporations more favourably.
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b) Limited Liability.
This point is often forgotten. A limited company is a separate
legal entity from its directors; the company can own assets,
incur debts and pay bills in its own right. If a company is sued
your house cannot be taken (unless there is a personal
guarantee). Whereas a sole trader your important assets could
be taken if you cannot pay debts or damages. If your trade
involves some risk of things going wrong then maybe worth
seriously considering incorporation
1.3 Disadvantages of a limited Company
a) Paperwork and compliance hence more costs
b) Legal Responsibilities as a director
c) Privacy – company accounts visible to public
2.
Conclusion
There are many reasons why it may be worthwhile incorporating a
business though it may not be ideal for everyone especially those
that want everything to be straight forward and simple. While the
biggest advantage of incorporation is tax savings there are other
considerations like marketing which could benefit a business. On the
down side there are additional costs when incorporating a business
but the potential savings do outweigh the costs. Some will argue
profits will be wiped out by increase in accountancy fees but not if
you are using us. We are more than happy to visit you free of charge
to discuss the pros and cons of converting your business to limited
company status.
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