Sgould I become a limited company? (UK)

October 30, 2008 4:15 AM

I've been a sole trader for 10 years, but calculators such as this suggest I could save maybe £2000 a year on tax by becoming a limited company. Have others found it worthwhile?

I'm aware the incorporation means more paperwork, as I'm already a director of another small company, though that's largely defunct now. As far as I understand it there are two main options for income in this way:
1. Draw a salary
2. Draw dividends. The site mentioned above suggests a salary of around £5000, and taking the rest as dividends as the way to minimise tax burden.
Does anyone know if it's legal/sensible to go down a third route:
3. Subcontract work to oneself as a sole trader. (ie so corporation tax is only paid on profits above the costs of subcontracting and other expenses, and I would pay normal personal tax on the profits from the contracts.) Or is this not allowed? Or too complicated?

I'll need to talk to an accountant about all this, of course, but any relevant experiences would be interesting to hear. (I'm below the VAT threshold, by the way.)

posted by hatmandu to work & money (3 comments total)

For 'sgould' read 'should', obviously - doh!
posted by hatmandu at 4:16 AM on October 30, 2008

Well, anecdotally, me and a colleague both do the same job, but I'm working as a sole trader and she's working as a limited company. She's making more than me by doing it, but apparently it's not that much more once you factor in the extra accounting costs, and relative to the extra hassle, she thinks it was better working as a sole trader.

I'd say it really depends on what field you're in and what sort of work you're doing. We both work in a freelance capacity for other companies, which means using their office space, computers, etc. So from my point of view I can simply turn up, work on an ad hoc basis, and send them an invoice. She's got to get proper contracts sorted out on everything, run it all through her accountant etc, and in our field not all companies are geared up to deal with this level of paperwork. Basically I'm going to stick as a sole trader because my accounts are dead simple. I'd say if your accounts are complicated anyway, then you've probably not go a lot to lose becoming a limited company.
posted by iivix at 7:40 AM on October 30, 2008 [1 favorite]

If you're an individual looking to create a limited company as a tax-saving vehicle in the UK, you need to look into the issues around IR35. IANAA and as you say, you need to speak to one.

There are companies that specialize in providing umbrella services to get around the provisions of IR35 - most are targeted towards well-paid technical consultants (i.e. freelance programmers). Here's one from a JobServe email from a couple of days ago.
posted by lowlife at 7:52 AM on October 30, 2008 [1 favorite]