In this blog we will discuss the pros and cons of operating as a sole trader versus a limited company for 2023-24.
What is a Sole Trader?
A sole trader, also known as a sole proprietor, is a type of business structure in which an individual owns and operates a business. As a sole trader, the individual has complete control over the business, and is responsible for all aspects of its operation, including management, finance, and decision-making. In this type of business structure, the owner has unlimited liability, meaning that they are personally responsible for all of the debts and losses incurred by the business. Additionally, the business income and expenses are reported on the owner’s personal income tax return. Sole traders are common in many countries and are often used by individuals who are self-employed, such as freelancers, consultants, and small business owners. This type of business structure is relatively easy to set up, and does not require much formal paperwork or legal requirements.
What is a Limited Company?
A limited company is a type of business structure in which the company is considered a separate legal entity from its owner(s). This means that the company has its own legal identity, separate from the individual(s) who own or operate it. In a limited company, the owner(s) are known as shareholders, and their liability is limited to the amount of money they have invested in the company. This means that the shareholders are not personally responsible for the debts or losses of the company beyond their investment, and their personal assets are protected. Limited companies are typically more complex to set up and manage than sole traders or partnerships, and may require more formal paperwork and legal requirements. However, this type of business structure can offer certain advantages, such as access to more sources of funding, greater potential for growth and expansion, and increased credibility with customers, suppliers, and investors. There are different types of limited companies, such as private limited companies and public limited companies, each with its own legal requirements and obligations.
Which should I choose?
Choosing to operate as a sole trader or a limited company for the 2023/24 tax year involves several considerations, particularly in light of the new corporation tax changes.
The first aspect to examine is the tax savings that a Sole Tradership can provide. The table below illustrates the tax liability for the 2023-24 tax year, comparing the two business structures.
| Profit Level | Sole Trader | Limited Company | Saving |
| £50,000 | £10,855 | £11,856 | £1,001 |
In tax terms, operating as a sole trader versus limited company for 2023/24, will still leave you with more spendable income where your profits are £50K per annum. However, that’s not the whole story and there are a number of other issues you’ll need to consider.
Starting a business as a sole trader is relatively straightforward, as there is less administrative work involved than running a limited company. However, it is still advisable to conduct all business transactions through a separate designated bank account. Registering as self-employed with HM Revenue and filing a Self-Assessment tax return is also relatively straight forward too.
On the other hand, many businesses opt to start as a limited company because it provides enhanced status in the marketplace. Limited liability is one of the main advantages of trading as a limited company, as any liability is limited to the amount of issued share capital. Additionally, planning for retirement can prove advantageous, particularly if you’re planning to boost your pension provision significantly. A company is also considered a separate legal identity, which can be useful if you work in a sector with a high risk of being sued.
However, trading as a limited company also has several drawbacks. There is a lot more administration involved, such as filing an annual confirmation statement with Companies House and ensuring that the company’s accounts are in a format prescribed by the Companies Act 2006. Losses can only be set off against any profits made by the company in the prior year or future years, making cash flow difficult in the early years. Additionally, the company’s money and the owner’s money are entirely separate, which can cause adverse tax implications.
One of the most critical considerations when choosing between a sole trader and a limited company though is tax liability. The table below sets out the tax position for the 2023-24 tax year.
| Profit Level | Sole Trader | Limited Company | Saving |
| £75,000 | £21,320 | £22,240 | £920 |
| £100,000 | £31,820 | £35,067 | £3,247 |
| £150,000 | £59,090 | £63,083 | £3,993 |
It’s undeniable that the dividend tax introduced by George Osborne and the further changes implemented by Jeremy Hunt have eroded the potential tax savings available as a limited company previously.
We’d also mention that the above calculations assume that all post corporation tax profits are paid out as dividends. However, one of the advantages of a limited company structure is that unlike a sole trader an individual in a limited company structure is only subject to income tax on those profits taken personally from their company. This is advantageous when it comes to avoiding the child benefit tax charge or the loss of the personal allowance when income/profits exceed £100K per annum.
Furthermore, a limited company structure can also save you tax if you intend to retain profits in your business.
Conclusion
Deciding between a sole trader and a limited company depends on several factors, such as your business goals, the level of control you want over your business, your personal financial situation, and the potential risks and liabilities of your business.
If you are looking for a simple and flexible business structure, and you don’t expect to incur significant debts or liabilities, a sole trader structure may be a good option. As a sole trader, you will have complete control over your business, and the administrative and legal requirements are generally less complex and costly than those of a limited company.
On the other hand, if you are planning to grow your business, secure funding or investment, or protect your personal assets from business risks, a limited company may be a better option. A limited company can provide greater protection for your personal assets and offers more opportunities to raise capital and expand your business.
Ultimately, the decision between a sole trader and a limited company will depend on your specific business needs and circumstances.
We can help you
Our team at Kingston Burrowes has extensive experience helping and supporting hundreds of clients determine whether the sole trader or limited company route is best for them based on their specific needs. To explore how we can support you, simply get in touch.
