What is the difference between trading through a Limited Company or deciding to be self-employed?
Are they taxed the same?
Can you only be VAT registered if you have a Limited Company?
If you trade through a Limited Company, can you avoid the payment on account?
You may have a lot of questions when you decide to start on your freelance journey; that’s only natural. So here is a quick run through of the questions I am typically asked, which I hope will help you.
When will I need to register?
If you decide to trade through a Limited Company, you will need to create the Limited Company before you are able to do anything.
This is because a Limited Company is a separate legal entity to yourself (this is the reason why your house will be safe if things go pear shaped) so you cannot trade through something that doesn’t exist.
If you are self-employed, you have until the 5 October of the following tax year to tell HMRC that you are trading. This means that if you began trading in June 2018, you have until 5 October 2019 to tell HMRC, should you want to.
It may be worth noting that if your total sales are below £1,000 within the tax year, you do not need to register with HMRC. A little tip there.
What expenses can I claim?
For the bulk of your expenses, whether you are self-employed or trading through a Limited Company will make no difference. A business expense is a business expense.
The differences will begin to show on purchases that have a duel personal and business use. These are expenses such as motor expenses, mobile phone costs and use of home; things like that.
The difference arises because if you are self-employed then you fall under the rules of a business owner. However, if you are a Director of a Limited Company, you fall under the rules of an employee.
To use motor expenses as an example, if you are self-employed you can choose to either use a percentage of your actual motor costs or claim 45p per mile. You can also bring in your car as a business asset, if you wish.
When trading through a Limited Company, you can only claim the 45p per mile. If you choose to bring your car into the Company, it will be treated as a company car and you will have a P11d and will have to pay additional national insurance on it. This is because HMRC will consider the personal use of a company car as additional salary.
Who will my clients be working with?
If you are self-employed, your clients will be working with you. So, all contracts will be between them and you. Insurances for example will be between the insurance company and you. It’s all you. You.
When you trade through a Limited Company, your clients will be working with the Limited Company. Contracts should be between them and your Limited Company. If you purchase insurance, then it should be the Limited Company who is insured and not you. If you take out a business loan, then it needs to be in the Limited Company’s name and not yours. It’s not you. That is why your house is safe. It’s not you.
Who will I deal with (from an accountancy point of view)?
Being self employed means that you will only need to deal with HMRC, and the relationship is likely to be very taxed based.
The tax and HMRC relationship will continue if you trade through a Limited Company, but you will also have to work with Companies House.
Companies House will be interested in whether your Limited Company is trading, if it is solvent (can pay its debts), and who the directors and shareholders are.
If you aren’t sure whether you need an accountant, I run through the options in this blog. And as a spoiler, the answer isn’t always that you do.
When will I need to submit my accounts?
If you are self-employed, you will need to submit a self-assessment tax return by the 31 January after the end of the tax year.
Trading through a Limited Company brings with it a little more admin.
Your Limited Company will need to submit its own company tax return and accounts to HMRC as well as a shorter set of accounts to Companies House both within nine months of its year end.
As a Director, if your own income will give rise to a tax liability, you will need to complete a self-assessment tax return as well.
When will I need to pay my tax?
The tax points for a self-assessment are 31 January and if you have a payment on account, the second one will be due by 31 July.
Payments on account will kick in once your tax liability exceeds £1,000 and this is the same regardless of whether you are self-employed or a director and shareholder of a Limited Company.
You can read more about payments on account here if you wish.
As your Limited Company will have to complete its own company tax return, it should come as no surprise that it will also have its own tax liability.
The Limited Company will pay corporation tax, and this will be due nine months after its financial year end.
How will I be taxed?
If you are self-employed, you complete your self-assessment tax return and tell HMRC what profit you have made during that tax year and then you pay tax on this profit.
It doesn’t matter what money you have taken from the business. You are taxed on your profits.
A Limited Company is the same in that it will pay corporation tax on its profits.
A Limited Company doesn’t have a personal allowance however, so it will begin to pay tax from the moment it makes £1 in profit.
But then there is your personal income that you will extract from the Limited Company in the form of a salary and dividends.
You will then need to declare your salary and dividends alongside any other income you might have on your self-assessment tax return and personally pay the tax due on this.
Do I need to register for VAT?
VAT in a separate tax and once your turnover exceeds £85,000 you will need to register for VAT regardless of whether you are self-employed or trade through a Limited Company.
You can, however, register for VAT even if your total sales is under the threshold and I run through whether this is worth considering in this blog.
How will I get paid?
The advantage of being self-employed is that you can take whatever money you want from the business.
As you will be taxed upon your profits and the money you take is not considered to be an expense. This gives you the freedom to do as you wish. You can pay for the weekly shop from your profits or use a personal account instead of a business one if you want.
When you trade through a Limited Company, you should not mix personal expenditure with that of the company. This is because the Limited Company is a separate legal entity to yourself. The reason why your house will be safe is because the money within the company does not belong to you, so you need to extract it more formally.
Salary will need to be taken through a PAYE scheme and dividends will need to be voted from profit after tax. I run through this in more detail here.
What else should I consider?
As with everything, there are pros and cons of both being self-employed and trading through a Limited Company and what these are will vary from person to person.
I am a firm believer that you should never put the tax cart in front of the business horse, but if you want to know a rough profit figure where it become more tax efficient to trade through a Limited Company then I would suggest £25,000.
If you are considering starting your own business and are unsure of what route to take, then I recommend that you read this blog first to give you some initial questions to answer.
Following on from that, I recommend talking to an accountant. Boring I know, but it will ensure that you get your business off to the best of starts.