• a limited company is a separate legal entity
• you won’t necessarily pay less tax as a limited company
• the UK corporation tax main rate goes up on 1 April 2023
• the financial information of a limited company is visible to the public

In some cases, you could pay less tax overall on the same amount of money earned if you trade through a limited company rather than as a sole trader. This will depend on the level of your income and how you take it from your company.

When you’re a sole trader, you pay income tax on your business’s profits above the personal allowance, as well as national insurance above certain thresholds. 

When your business is a limited company, different taxes and national insurance can apply to your company and to you personally, depending on how much money you take out of the business. A notable difference is that a company pays corporation tax on its profits.

Depending on how much profit the company makes and how much money you want to take out of it, you may be able to use a combination of salary (which you pay to yourself as an employee of the company), dividends (which you pay to yourself as a shareholder) and loans from your company to maximise the money you receive.

There are lots of trade-offs, and the best outcome is very much dependent on your circumstances. For instance, a salary reduces your company’s profits subject to corporation tax but is generally subject to higher income tax through PAYE compared to dividends and loans. There’s no national insurance payable on the income you receive in the form of dividends, so small businesses tend to take a salary below the national insurance thresholds and the rest as dividends.

Overall, the tax advantages of using a limited company have been eroded over the years, and from 1 April 2023, the corporation tax main rate for profits over £250,000 will increase from 19% to 25%. Companies with profits of £50,000 or less continue to pay corporation tax at 19%, but between £50,000 and £250,000 a tapered rate applies, going up gradually to 25%.

You also need to bear in mind that before you pay a dividend, you need to make sure the company has enough retained profit to cover it – and corporation tax must come off the company’s profits before you pay out any dividends. 

You have to prepare dividend vouchers every time the company pays out. Accounting software like FreeAgent can help you check that the company has enough profit to pay a dividend. FreeAgent can also prepare dividend vouchers for you.

If you’re considering setting up a limited company for your business, talk to an accountant first because everyone’s tax situation is different and what works for one taxpayer may be bad news for another. There are a lot of potential pitfalls as well as possible savings.

A limited company has a separate legal identity

When you’re a sole trader, legally there is no difference between you and your business. That means that if your business is sued, so are you – and you could lose your house, your car and other personal assets.

A limited company, on the other hand, has a separate legal identity of its own. This means that if the business is sued, it’s the company that’s sued. The directors and shareholders generally won’t lose their own assets, unless, in the case of the directors, they’ve given personal guarantees or been found guilty of wrongdoing.

Some company details are public

If your business is a limited company, it must have a registered office address, which you must display on all the company’s correspondence, including emails. Limited companies must also submit accounts and returns every year to Companies House. Anyone can then view your business’s accounts online, free of charge, although depending on the size of your business, this could just be a balance sheet of assets and liabilities rather than your profit and loss account. 

Directors have legal responsibilities

Limited company directors have certain legal responsibilities, which are laid down by Companies House. Failing to meet these responsibilities can result in a director being disqualified from acting as a company director. They could also face hefty fines or, in the worst cases, a prison sentence. Remember, you should talk to an accountant first if you’re thinking of trading through a limited company.