Sole Trader VS Ltd Company

[Sweetpea1989]

I am looking for advice on whether to start as a sole trader or LTD company for me my side business in e-commerce.

I am full time employed earning 70k a year, looking to start a business in my spare time starting very small and seeing where it goes (the dream would be for this to grow to being able to quit FTE)

I don't intend on taking a wage from my side business, and would re-invest the profits back into the business.

Am I correct in thinking as sole trader I would be taxed at 40% on all profits, and as LTD company I would only be taxed if I took dividends?

From a tax point of view would LTD be better for me considering my full time wage?

I know one factor that puts people off LTD is the tax return, how challenging is that, would I need accountant support and would that come with a hefty price tag?

Thanks

Things have changed since I grappled with the same considerations some time ago but just wanted to mention. Take a look at your local chamber of commerce and see what events/support they have on this type of thing. My local one was great, free sessions to discuss all the detail and access to lots of the latest helpful information.

Ltd pays corporation tax on its profits and then the individuals pay tax on their dividends. Ltd needs to file returns with companies house.
As a sole trader if you make capital purchases or investment you only pay tax on profit.
it could depend on if the business has financial risk through borrowing money if it does ltd has a limited liability, sole trader you carry all the risk.

That is a very simple version.

When I made that decision, it didn’t make financial sense until about £40,000 to be a limited company, I think it might be a bit higher now because of the tax on dividends, But I still made the decision to be a limited company right at the beginning because I felt it looked more professional, and some tenders required it and I had more personal protection if anything went wrong. I had previously been able to do all my sole trader paperwork myself, but needed did an accountant once I became a limited company, so that added costs.

As a PP says, you’re first taxed on profits within the company, 19% for small profits or 25% for larger companies then dividend tax when you take it out of the company, the rates are here https://www.gov.uk/tax-on-dividends - 33.75% for higher rate tax payers, so given you already have paid corporation tax on the money, this is probably a more expensive way to do it.

I won't repeat a lot of the advice you have already been given but just to say being sole trader used to save you a lot of admin but depending on your turnover it could be you are mandated to Making Tax Digital which will involve quarterly submissions to HMRC as well as the end of year Self Assessment Return with penalties if you are late with any submissions.

I think these days unless you have quite a bit of time to spend on the accounts side you are best using an accountant which ever route you choose.

How much are you expecting to make? There is a trading allowance of £1000 so you can have £1000 of income and not pay any extra tax as a sole trader. If your income is going to be significantly higher than this it would be worth looking a setting up a limits company although the admin demands of this are much gp higher than being a sole trader.

the tax advantages of being a limited company v sole trader have reduced over last few years and aren’t what they were but the main advantage is that you can control your personal income and potentially avoid going into any tax traps like total personal income over £100,000 where you pay an effective rate of 60% tax and lose childcare if that is relevant.

The usual accountants advice would be to go limited as you pay higher tax rate. You will need an accountant for limited company accounts - I would say shop round for quotes because they vary considerably. It depends on how successful your business becomes really because you will have accountancy fees to pay monthly which can be very off putting if you are just starting out. Personally, if you aren't concerned about that financial outgoing and want greater protection, I would go limited but I would book
a free consultation with a chartered accountant and a company law lawyer before you decide. I really didn't enjoy making this decision either - you have my sympathy.

This used to be the go to advice but it is changing with the dividend allowance being reduced. Nowadays going Limited is not always the best option.

Yes I agree, I've opted for sole trader because it also has very many benefits and you can cover risk by getting public liability insurance anyway. I will change when I get close to the vat threshold most likely.