Understanding your employment status is crucial for tax purposes and financial planning. One common area of confusion is determining the distinction between being self-employed and operating as a limited company of which you are also an employee of the company. It can seem subtle, yet it has significant implications for taxes, legal obligations, and the way you manage your business. In both scenarios you organise and undertake your own work, though the structure and responsibilities differ.

When you are self-employed, there is no legal distinction between you and your business. All profits and losses are your personal responsibility. As a result, you are required to report your business income and expenses on your personal tax return. Allowable expenses can be found on our A-Z guide.

If you operate as a limited company, there are a variety of different forms of income you may receive. This may include a salary, benefits in kind (such as private health insurance and a company car) or dividends. If you take a salary then tax and national Insurance may be deducted via PAYE, though it will still be your responsibility to submit a personal tax return to declare any other income you have received such as dividends and rental income.

It is important to note that your company is seen as a separate legal entity and pays it’s own tax bill on the profits it generates each year. As a shareholder and/or employee you then pay personal tax on the income you receive from the company. The advantage of this structure is that it gives you much more control over your personal taxes which provides planning opportunities and tax savings.

While both being self-employed and being employed by a company you own involve working for yourself, the two scenarios differ in terms of business structure, taxation, liability, management, and financial benefits. Understanding these differences is crucial for making informed decisions about how to structure your business and manage your professional life effectively.