Our latest webinar covers the ins and outs of being a Sole Trader vs a Limited Company. We’ve collated all questions and placed this into our jargon free Q&A.

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My question is more specific to providing services not products. As a psychotherapist working full-time (NHS) in addition to private practice on top in the UK. I already have sole trader (and am due to submit my first self assessment next year). What would you recommend in regards to my situation?

This is quite a common situation and depends on what you plan to do with the sole trader income. If you plan to enjoy it now as part of your current lifestyle then you may find it is better to be a sole trader. However, if you plan to let this build up or invest it (either in a pension or other assets) then a Ltd company could be a better option as it will help to mitigate your initial tax liabilities, leaving more to be invested.

Can you tell me how to get funding for business set up and how many months of business set up costs should you account for?

There are many lenders out there that specialise in funding for new businesses. However, choosing the right lender and type of finance depends on your situation, the type of business you run and your plans for the future. As this is a regulated market we are not able to advise you, but suggest you find a broker who can find you the best deal, using the most suitable type of finance. You should be well prepared for any finance applications with forecasts, which will give you an idea of how much you will need to borrow in order to get the business started effectively.

Client hospitality and event expenses, how does this work?

Client hospitality is an allowable business cost, as long as you can prove it is in order to gain a new contract or to maintain a current contract. It is not, however, tax deductible and any VAT charged cannot be reclaimed.

I currently operate through a Ltd Co. I’m retiring and closing the company next summer, but will still need to provide some ad-hoc support to one or two existing clients. What are the pitfalls to avoid in doing this on a sole trader basis?

It’s likely that the main considerations here will be liability (so insurances and/or Ltd liability of a company) and maximising income (which depends on your other income sources). If you are of state pension age then you will benefit from class 4 NIC exemption as a sole trader so this may be the best option.

I want to understand the legal structures as regards tax efficiencies, admin intensity, accountant requirements and the costs thereof. These were all covered in the webinar, but do call us for further guidance. 

Are sole traders registered on Companies house?

No, you will only need to tell HMRC.

What are director obligations versus sole proprietor? Is there personal liability with either option?

As a director you must ensure that, amongst other things, the company meets all of its filing requirement. More information can be found here: Becoming a company director. There is personal liability as a sole trader but not with a Ltd company (except in certain circumstances when taking out finance or severe negligence as a director, including money laundering cases). In both cases, we strongly advise that you have insurance with an appropriate level of cover.

Why don’t we consider partnerships? For example if I’m working for client in a team where half the staff are contract, could the contractors restructure as a partnership?

For the context of this presentation, the advantages & disadvantages of a partnership are almost identical to that of being a sole trader. The contractors could restructure as a partnership but I doubt there would be much difference in the overall tax efficiency of it as you would still all be taxed on your share of the income. You would also need to decide on how the profits would be split, which may be unfair if the workers had different pay rates or work different hours. You will also probably need to consider VAT registration. The partnership also does not give you all limited liability and so a Ltd company could be a better option commercially, regardless of the tax implications.

Is there a rough turnover point in which it’s better to be a Limited Company?

After the recent changes, and as you will have seen in the webinar, the difference in tax liabilities is marginal. However, those figures do not take into account any expenses or the tax planning elements we covered. The overall tax efficiency will be slightly different for each person based on their circumstances but this is something we can look at in more detail if you would like to have a consultation.

What is the approximate annual cost (fee’s etc) of running a limited company vs sole trader?

Generally, the running costs are quite similar. For accountancy, though, this depends on which services you require. If we compare like for like, our standard Ltd company contractor fee is £110 + VAT per month, which covers pretty much everything you and your company will need on a regular basis. The cost of this same service as a sole trader would be £80 + VAT per month. The Ltd company costing an extra £360 + VAT per annum, but this could be offset by significant tax savings.

Can I set up a limited company in the UK and moving abroad eventually?

Yes, this is possible. However, if the company was still open you would need to consider the tax consequences of the UK income when abroad. Your UK income would still be taxable in the UK and as a tax resident in another country it is very likely that you would need to report the income there as well (although, you may be able to get double taxation relief there, something that could be discussed further if you wanted to). It may even be better to close the UK company and pay any taxes before moving.

Does IR35 effect sole traders or just Ltd?

No, as IR35 is a determination as to whether someone is deemed to be an employee or not. If deemed to be an employee, they should be engaged with as an employee and paid accordingly. We have, however, seen with the Gary Lineker case that HMRC would use IR35 legislation when looking at the relationship of a partnership and its clients.

Can I/should I mix sole trader and limited company operation for different types of work and clients?

I would advise against this as you would be mixing income sources which could lead to a higher overall tax liability. This is something that would definitely need to be looked in more detail though so that we could prepare some tax planning to see which model would be best for you.

I do a lot of public sector – central/local government, NHS contracts. Do I need to have a ltd company to work with them?

Not usually. However, sometimes they will prefer to deal with Ltd companies – this depends on the role and is recommended to speak to your end client. 

I have been a limited company since 2020 after 20-odd years of contracting – I think I am paying more in taxes now than when I was freelancing as myself and when I worked as an associate on a day rate self-employed. Am I?

Possibly. We have seen significant changes in 2017 and now in 2023 with the changes to dividend tax rates and the new, increased, corporation tax rates. If you would like us to prepare some comparisons then please let us know.

What are the differences between Ltd company and Sole trader with an IR35 caught contract and outside of IR35 contract. Is one more favourable inside and the other outside?

You shouldn’t be able to operate inside IR35 as a sole trader. In this scenario you should be an employee of the end client or working through an umbrella company. Working through a Ltd company inside IR35 is not so common anymore as the end clients like to put this through an umbrella company in order to remove their risk. Operating through your own Ltd company or via an umbrella company should lead to a similar, if not identical, tax outcome.

Which set up is best if you are working inside IR35 contracts?

This depends on any other income you have. We do, however, see most inside IR35 contracts paid via an umbrella company now. We are partnered with an umbrella firm, who provide their services to our clients at no extra cost to you. The tax & NICs due on the income should be pretty much the same though, whether via a Ltd co or umbrella.

I’ve been a limited company since 2020, but self-employed for 25 years. I have a mix of contracts (public sector, usually outside IR35, project change management) and clients in Not-for-Profit, small businesses (marketing/business change). I’m paying flat rate VAT and my income last year was £57,000 – but I seem to have less money than when I was self-employed. Should I go back to being self-employed?

It is possible that being self-employed would be more tax efficient for you. However, this depends on whether you have the scope to dial in some of the more Ltd company specific benefits, like adding a spouse/partner, ensuring you are maximising your expenses or even a company car. It sounds like you need to have some proper tax planning prepared to compare the two and make an informed decision. Additionally, you may wish to look at whether it is worth switching off the flat rate VAT scheme in order to reclaim input VAT on your expenses. The benefit of the flat rate scheme is reduced significantly after the first year of registration.

The majority of my income is in full-time employment with a pension already set-up, I am now going into the 40% tax bracket). An additional amount from my private practice as sole trader therefore tops up my income and I do have my first self-assessment due by next October. Am I right in thinking I should just be concerned in my combined income? or should I be treating these separately as I am already paying tax and NI on the bulk of my employee income.

You should be reporting all income (even if already taxed) on your self assessment.

As a sole trader, you will be paying income tax on your profits at 40%, or even 45% if your income is enough, as all of your income is taxed together in the tax return. As you will have already paid NICs on your salary, we are able to restrict the NICs due on your sole trade profits to 2%, after taking into account the allowance you receive.

Use of Home allowance – what is the parameters for £10, £18, £26?

As a sole trader, use of home allowance is based on the number of hours you work from home each month:

• 25-50 hours – £10p/m
• 51-100 hours – £18p/m
• 101+ hours – £26p/m

As an employee or a director of a Ltd company you can claim £26p/m, regardless of the amount of hours worked from home each month.

What about subsistence when working remotely/on site?

This is in line with the travel to and from site expenses. If you are travelling to a temporary site then it is likely that you can claim the cost of the travel and some subsistence. However, travel costs is a bit of a grey area so would definitely recommend discussing this with an accountant so that they can dig a bit further into your situation and see whether any expense claims would be appropriate.

I operate as a sole trader and I have 5 contributors, who live abroad. Can I claim an annual event allowance for meeting up in Italy for example?

I would say no, for a couple of reasons:

1. These are not employees so you would struggle to justify claiming this, rather than treating it as business entertaining.
2. As it would be to a foreign country, it could be seen as a just going on a holiday, which is obviously not tax deductible.

Certainly worth having a chat through this with an accountant though to make sure you do claim anything that would be appropriate.

With the electric care purchase for a ltd company, does this have to be outright purchase or can it be leased?

The benefit in kind on vehicles covers leases as well as those owed by the company. Be careful though, as you would only be able to reclaim 50% of the input VAT charged on the lease. You should also be careful of the capital allowances that you can claim as only brand new, fully electric vehicles qualify for full first year allowances.

I have run as sole trader since our limited com closed due to COVID in 2022.  Work is adhoc at the moment, at what point does it make sense to move to limited co?  Some banks will not open limited co accounts without longer contracts in place.

This is not something that should be dictated to you by the banks. We partner with Starling Bank and I have not heard of any issues getting an account open because of the length of your contract.

This decision should be based on your plans, your expected profits and what works best for you. If you find you are struggling to get an account open then there may be other options. Either way, I’d say that getting the company up and running is more important than the bank account.

Is there an official link you could provide to which the various salary / dividend tax bands thresholds (in £££, not %) are set for the current tax years and for the previous tax years?

You can visit our Contractors Guide to Dividends which you may find useful, or alternatively visit the Government website which includes all rates. So don’t be too worried if it’s a bit overwhelming: Income Tax Rates.

Can you describe how a ltd company providing consulting services could invest in property – would it be buying property outright or does it extend to just providing a deposit and then getting a mortgage in the companies name? Wouldn’t I need to set up a separate ltd company for the property element and then provide a loan to that company from mine as an investment?

We see a mixture of both outright purchasing and deposit + mortgaging at the moment. Often, though, when there is finance involved the banks will only lend to a Special Purpose Vehicle (SPV) which is just a second Ltd company, owned by you, which is loaned the money from your consultancy company.

Regarding business entertaining, is the VAT recoverable even though it is not tax deductible?

VAT is not reclaimable on business entertaining costs.

Is the cost of a hybrid fully deductible or is it just fully electric?

The cost of any vehicle is tax deductible in some way, shape or form. However, depending on the CO2 emissions, a hybrid vehicle probably won’t qualify for full 1st year allowances. If you know which car you would like then I would check the emissions and then check that against HMRC’s capital allowances tables. Alternatively, feel free to get in touch and we can discuss your plans and the tax implications.