Limited Company 'v' Sole Trader

The tax benefits of trading through a limited company are attractive for businesses with modest profits.
The illiustration below highlights, based on the UK tax rates for 2011/12, the overall tax saving trading as a limited compan

Annual Profits

Sole Trader £10,000£30,000 £50,000 £100,000
Tax & National Insurance £885 £6,685£13,463 £34,463
Limited Company
(Corporation Tax)
£586 £4,586 £8,586 £18,5860
Potential Tax Savings £299£2,099£4,877£15,877
The above comparison assumes company profits are extracted first by a salary of £7070 with the remainder drawn as dividends up to £28,000 per year per shareholder
Businesses should consider other issues
  • The ability to extract or retain profits in a different manner and the use of other family members' tax allowances and reliefs
  • The more generous corporation tax deduction regime for purchased goodwill and recovery of sub-contractor CIS deductions
  • The Limited Company provides a basis for the continuation of the business eg farm by the transfer of shares. If a shareholder wishes to retire, sell his shareholding, or dies, it is far easier to transfer ownership of a limited company than a non-registered business structure
  • A measure of protection from creditors
  • Proposals to reduce the corporation tax rate to Northern Ireland companies to 12.5%
  • Ability to deduct pension payments as a deductible expense. The company can fund its employees' pensions as a legitimate business expense
  • For unincorporated businesses converting into a limited company, the ability to crystallise the goodwill of the business and extract this tax free from the company. This can also assist with lowering your taxable personal income and hence improving entitlement to Child Tax Credit
  • Mileage allowance can be paid by the employer (the Company) to the employee (the Director) for business use of the employee's own car. This is set at 45p for the first 10,000 miles and 25p over 10,000 miles
  • The additional paperwork, other administration work and professional fees associated with trading as a limited company
  • Keeping personal finances seperate from company finances
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