19 November, 2014

Sole trader or Limited company?

So what does this all mean and which offers the best deal?

There are advantages and disadvantages to each approach, particularly when it comes to tax efficiency.

Limited company

A limited company is an organisation that you can setup to run your business, it’s responsible for any legal and financial decisions and it’s finances are separate from your own. Setting up a limited company involves incorporating your company, setting up a business bank account and becoming a director of your company.

Sole Trader

Setting up as a sole trader means you’re running your business as an individual and therefore are classed as self-employed.

So what are the advantages of a limited company?

Lower personal financial risk

Your personal assets are protected and separate from the limited company. If a limited company gets into financial difficulties, personal bank accounts and assets such as the house, the car, shares etc… cannot be claimed as they sit outside of the limited company.

Tax planning

A sole trader will be taxed on income, which means paying tax and National Insurance Contributions(NICs) on everything you earn, approximately 30% of your gross income.

Operating as a limited company you pay Corporation Tax at 20% (as of 1 April 2014) as long as the profit’s are £300,000 or less. As a shareholder and employee of a limited company often the most tax efficient method of extracting remuneration is through a combination of a low salary and the balance as dividends from the profit, this will minimise the Pay As You Earn(PAYE) and NICs. The objective is to find a balance between paying sufficient salary to qualify for state pension and other benefit’s, while obtaining the most tax efficient income.

Business expenses

Through your limited company you can also claim business expenses such as computer equipment, smartphones, stationery, travel and where applicable entertainment. The rule for all expense claims is that you can only reclaim for expenses which have been incurred exclusively and necessarily in the course of running your business. Any expenses you successfully claim will be deducted from the company’s profit and will not be taxed, thus reducing your company’s overall tax bill.


Some clients and investors will view a limited company as a more credible business than a sole trader, this can help when it comes to raising funds and winning contracts with larger businesses.

Another bright way to increase your credibility is by having an excellent office address. For a small business, you can’t go wrong with a Central London office address. If that sounds good you should check out the cheap virtual office that the Hoxton Mix provides based in Old Street.

So what are the advantages of staying Sole Trader?

Less paperwork and administration

Both sole traders and directors of limited companies are required to submit a Self Assessment Tax Return to HM Revenue & Customs (HMRC), however those operating a limited company must also submit additional paperwork including Corporation Tax, Annual Accounts and *VAT returns (if VAT registered).

* Sole traders if your turnover exceeds the VAT threshold (currently it’s £73,000 a year), you will need to register for VAT. Once VAT registered you charge your customers VAT on VAT-able goods (currently 20% ) and pay this to HMRC via a VAT return. In turn, you can reclaim the VAT you pay on goods and services.

Lower accountancy costs

Accounting is generally easier and cheaper because sole traders accounts are dealt with by a personal tax return.

Control and flexibility

You have control over your assets and business decisions. If you have no debts, pivoting as a sole trader tends to be much simpler than with a limited company, and no record is held on a public register.

Privacy concerns

Sole traders only disclose their private information including turnover and ownership to HMRC, while a limited company’s information is held on a public register.

Virtual Office Plans

Prime London business address with 10 Minute Setup + NO Postage Fees!

Not a Virtual Office customer? Why not sign-up today.

41p per day + VAT

Virtual Office London

Get a Prime London business address
10 Minute Setup + NO Postage Fees!

Virtual Office Plans icon

Our meeting rooms are located at our Paul Street office,
and it’s just a few minutes walk from Old Street tube station…

Our Address

3rd Floor, 86-90 Paul Street,London,EC2A 4NEDirections

Opening hours

Monday - Friday 9am - 18.00pm

Our Address iconOur Address icon