Limited Company vs Sole Trader

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Email Out: 05 January 2011
(I enclose further details for you to read about my services).
This is an old chestnut and let me say there is never an absolute answer to the very best trading vehicle. Sometimes it is better to trade via a limited company and sometimes instead as a sole trader/partnership. It depends on your turnover/direct costs/gross profits/overheads and net profits.
As you can imagine these vary year by year especially for builders who are always seeking new clients and sometimes it works for you as a limited company and sometimes not.
However, you cannot change your trading structure year on year and so unless a pattern clearly emerges that is consistently low/high turnover etc then you must live with both the good times and also the not so good times.
Limited Company
Time Payable
Incorporate your business now and you immediately delay all tax payable. The accounting year end would default to 31 January 2011 and the corporation tax payable becomes due 9 months and one day after the year end that is 1 November 2012: yes, that is 12 + 9 = 21 months ahead.
Tax Rates
The tax rate will be just 20% by the time the corporation tax becomes payable. Contrast this with the present system of 28% for the self employed that is 20% tax and 8% Class iv NIC subject to the £5,720 exemption. Therefore at £10,000 profits the difference in tax becomes £10,000 x 20% = £2,000:
Less £15,720 (plus the paye salary) -6475 = £9,245 x 20% = £1,849 tax + £15,720 -5720 = £10,000 x 8% class 1v Nic = £800. Total amount payable becomes £1,849 + £800 = £2,649 and so the total tax saving is £2,649 – £2,000 = £649.
As the level of profits increase so the tax saving becomes larger. However, if profits fall then the difference becomes smaller.
Paye
I would begin a paye scheme for you with a salary of £5,720 per annum that is £476.67 per month. This is fully tax deductible in the accounts (£5,720 x 20%) = £1,144.
Fees for the service of filing monthly nil returns and accompanying paperwork is £200 per annum.
Financial Accounts
Difference in fees is £300 approx as I must satisfy both Registrar of Companies and HMRC as well as writing comparatives year by year as well as producing far more sheets of paper.
(£500 versus £900 very approx…)
Please note that my fees are for a full accountancy service and are fully inclusive of free unlimited email/text/telephone support should you have financial issues along the way.

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