Whether you are looking to start a business or to give us information relating to your tax return, it’s always good to know the differences between self-employment and limited companies. Each are subject to different laws and regulations and even have different reporting requirements.

It should be noted that following the new budget announced in Autumn 2024 there have not been any changes in regard to reporting requirements or what differentiates self-employment to a limited company.

Limited Company

• Separate legal entity – a limited company is its own legal entity, separate from the owner
• Corporation tax – calculated on the annual profits and all limited companies are required to pay
• Directors and shareholders – directors manage the company, and the shareholders own the company by owning the shares in it. A person can be both a shareholder and a director
• Companies House – forming a company first requires you to register with Companies House. During the company’s lifetime you will be expected to keep up to date records and make any mandatory submissions on time
• Dividends – aside from paying yourself a salary from the company, another way to extract funds from the company is through dividends. The company must have made profit or profits left over from a previous period

Advantages

• Typically, companies are more tax efficient, if things are planned well in advance
• Being its own legal entity protects the shareholders and directors’ personal assets if the company gets into financial difficulty
• Operating from a limited company affords you more credibility. Suppliers and customers tend to have more confidence in limited companies
• Lenders and investors seem to favour limited companies due to tax benefits and legal protections
• Potential personal tax savings if salaries and dividends are efficiently set up

Disadvantages

• Requires more administration time. You’ll need to keep accurate records and make yearly submissions to HMRC and Companies House
• The submissions you make to Companies House are on public record and thus anyone can view them
• Can be more complex to run. Which is why it’s recommended to employ the services of an accountant to help
• Harder to extract funds via dividends

Self-employed

• Legal entity – if you’re a sole trade you and the business are one single entity
• Self-assessment tax – to be filed yearly with HMRC by 31st January following the end of the tax year

 Advantages

• Quick to form as you do not need to register with Companies House, only HMRC to file self assessment tax returns
• Record keeping requirements for sole traders are less strict than limited companies’ regulations
• Sole traders aren’t required to submit their accounts to Companies House thus keeping it private
• Being the sole trader means you have full control over your business and get to keep the profits after tax

Disadvantages

• Being one legal entity can put your assets at risk if the business falls into financial difficulty
• Funding options tend to be harder to find or obtain due to the higher risk involved
• Depending on the profit levels you could pay more tax than a limited company
• Sole traders need to pay both Class 2 and Class 4 National Insurance Contributions
• Business name isn’t protected unlike limited companies
• Passing your business along can be complicated and may need a transfer of assets
• Seem less credible as a sole trader
• Unable to defer income from the business like you can with dividends

One question we get a lot is “am I self employed or employed?”, and I can understand why so many ask it. If you own the business surely you must be self employed, right? Not always. If you are being paid a salary from your limited company and this is being reported to HMRC for PAYE, then you are employed by your company.

If you are unsure whether you are employed or self employed or you would like to discuss the possibility of incorporating, please get in touch.