Freelance as Sole Trader or Limited Company?

I am a PCG accredited accountant specialising in acting for freelancers and their tax/accounts issues. The practice that I work for, Nyman Linden, has been around for over 40 years, I joined in 2012, having trained in a large mid-tier firm. We love working with freelancers as they are the key decision makers over the business – I get real insight into their future aspirations and goals.

When it comes to deciding whether to be a sole trader or a limited company, a sole trader is easiest, and if you are new to freelancing this can be advisable initially whilst you get familiar with the need to file personal tax returns. Furthermore, if you incur start-up losses, these can be claimed against your other income (a Company can only claim against its income).

However, if you are looking to grow your freelance operation and/or are expecting profits over £35k annually, a Limited Company may be for you. Generally speaking a freelancer earning £35k profits would save around £2,500 in tax & NI as a Limited Company.

Benefits of running a Limited Company

You can control the timing, amount and nature (ie dividends, salary) of your income, allowing you flexibility over how much income to be taxed on each year. Sole Traders are taxed on what they earn.

There are several tax benefits, including;

• If you are outside of IR35, you will remunerate yourself by drawing a small salary and draw the remainder of the profit from the Company as a dividend. These dividends do not attract National Insurance contributions, saving NIC. A sole trader pays 9% NI on earnings above the lower profits limit.
• The company can split shares between a husband and wife thus taking advantage of her own personal tax allowance and basic rate band, if not already utilised.
• If you are earning at the high rate of tax (40%), the ability to leave the money in the Company, to be drawn at a later date at a lower tax rate. Higher rate taxpayers can save significant tax this way.

A Limited Company pays tax 9 months (and 1 day!) after the year-end, e.g. 31 March 2014 year end pays tax on 1 January 2015. A sole trader typically will pay their tax bill ‘on account’ so for a 31 March 2014 year-end, the tax will need to be paid on 31 January 2014 and 31 July 2014. So, a Company is better from a cash flow perspective.

As a limited company with a trading name you can appear more credible (from a marketing point of view) when applying for new assignments.

The Company is a separate legal entity to you and liability for debts is Limited to the issued Share Capital, you personally are not liable.

Drawbacks of a Limited Company arrangement

Running as a limited company will result in increased administration, including the need to;

• File Company annual returns (£13 online).
• Prepare and file statutory accounts with Companies House and HMRC (even if you are not yet trading)
• File Company tax returns (CT600)
• File RTI Compliant payroll, in order to qualify for state benefits.

This extra administration however, will generally be carried out by an accountant.

How to register as self employed

You need to register using a CWF1 form, and in addition if you expect make profits above £5,725 (2013/14) you need to register to pay class 2 NIC contributions.

How to register your company

• Online (£15) – but only if the company is limited by shares and uses model articles of association
• By post using form IN01 (£40-£100) – you must do this if you change the model articles or use your own
• Using a formation agent (c.£50-£150) – an accountant will usually use an agent to form the company on your behalf.

If you have any further questions about whether to register as a sole trader or limited company, feel free to get in touch with me via Twitter.