As a new business one of the first choices faced is whether to run as a sole trader or a limited company.
You maintain complete control over the business and all profits after tax belong to you. However, there is no legal distinction between yourself and your business, so you will bear legal and financial responsibility as an individual.
You must inform HMRC of your new business activity on commencement of trading. You will then be required to complete and file a personal tax return detailing your income and expenditure for the year. Tax will be charged at 20 per cent of profit after deduction of your personal allowance and you will also have to pay nine per cent class 4 National Insurance Contributions.
A limited company is a separate legal entity from its directors and shareholders, therefore limiting liability should the business face any financial or legal issues. However, setting up and running a limited company is more restrictive and requires more administration.
A limited company can be more tax efficient. The company’s profits are taxed at 20 per cent and the profit belongs to the company. You as the director are paid as an employee and then in addition can withdraw dividends as a shareholder. These are taxed at a more favourable rate on the individual. You will still be required to complete a personal tax return.
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