Sole trader versus limited company for 2023/24

This article discusses the pros and cons of operating as a sole trader versus limited company for 2023/24 taking into account the new corporation tax changes

Sole trader or limited company for the 2021/22 tax year?

Perhaps one of the first considerations is the tax savings available as a limited company. As a starting point, we've included an example below showing the tax liability for the 2023/24 tax year.

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.

Running your business as a sole trader

A  number of businesses frequently start as individual freelancers. This can sometimes be referred to as being a self-employed sole trader. 

Starting your business as a sole trader is a relatively straight forward process and there's less admin involved than a limited company. However we do recommend you carry out all business transactions via a separate designated bank account. We've discussed the benefits of operating in this way in a previous article.

Dealing with HM Revenue as a sole trader is also relatively straight-forward. As a starting point you'll need to register as self-employed with HM Revenue and file a Self-Assessment tax return. You'll also need to make the appropriate tax payments on account by the correct due dates.

Trading as a limited company

Many businesses choose to start as a limited company because of the perception that this provides enhanced status in the marketplace.

Some of the advantages of trading as a limited company vs sole trader are as follows:

  • Limited liability - Any liability is limited to the amount of issued share capital. However it's worth mentioning that a lot of banks require personal guarantees from the directors. A lender can therefore seek recovery of their debt from the directors/shareholders in the event the business becomes insolvent. 
  • Planning for retirement - Trading through a limited company can prove advantageous, particularly if you're planning to boost your pension provision significantly.
  • Separate legal identity - A company is regarded as a separate legal identity from you personally. This might be useful  if you are working in a sector with a high risk of being sued e.g. magazine/newspaper publishing.
  • Changing ownership - The business ownership can be changed relatively easily by transferring shares though it's always important to consider the tax implications before undertaking this.  

There are also some drawbacks to trading as a limited company and a few examples of these are set out below:

  • Administration - There's a lot more administration involved. For example, a company is required to file an annual confirmation statement with Companies House. The company's  accounts must also be in a format which is prescribed by the Companies Act 2006. A sole trader does not have such restrictions. Typically there are also financial penalties for non-compliance with deadlines. The directors are at risk of prosecution if they don’t fulfil their statutory obligations correctly.
  • Losses - As a company is regarded as a separate legal person, any trading losses can only be set off against any profits made by the company in the prior year or future years. Typically some companies make losses in their early years and this lack of flexibility can prove problematic for cash flow. Conversely the losses made by a sole trader in their first few years of trade can be offset against other (non-trading) income in current and prior years.  
  • Withdrawal of funds - The company’s money and your money are completely separate – this can frequently be forgotten by some business owners! There can be adverse tax implications if this isn't managed correctly as you can see from our earlier post here. If you operate your business as a sole trader, you can generally introduce or withdraw cash from the business without any tax implications.
  • Public visibility - Because a company’s Statutory Accounts are required by law to be filed at Companies House, the results are freely available to the public (and your competitors).

Last and by no means least, the tax liability is one of the most important considerations if you are considering limited company vs sole trader. We set out the tax position for the 2023/24 tax year below.

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. There also appears to be an underlying trend by the government to reduce the potential tax savings between a sole trader and a limited company structure. 

We'd 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 is only subject to income tax on those profits taken personally from their company. This can be particularly advantageous for example 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, if you do intend to retain profits in your business, it's undeniable that a limited company structure will save you tax.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

Alternatively, please feel free to complete our Business Questionnaire here.

Spread the word!

Why Friendly

We work with businesses and contractors/freelancers who want to embrace the world of online software and the benefits this brings. Using technology to help our clients is at the core of everything we do.

So if you'd like to find out more, just give a call or drop us an email - no hard sell.

Just friendly, professional advice!

Who we are

We're a small team with over 50 years experience of working with small businesses.

So we're in a unique position to understand the challenges that you face every day in your business.

And what's more, we're fully professionally qualified so you can be sure that your affairs are in safe hands.

Copyright 2016 by TFA Accountants Limited