Tax benefits of moving from Self employed to Limited

If you're currently working as self employed and have decided to set up a limited company, there are several differences in how each type of business structure is taxed. Setting up your own Limited company takes just five minutes on the SJD website - visit our company formation page for more information.  

Theres no getting away from it, unfortunately tax is complicated, however hopefully this plain English guide will give you a breif overview of the tax benefits when going Limited. 

Tax on business profits - the differences

As a self employed individual, your personal and business finances are treated as one for tax purposes, so your business profits are taxed via the annual self-assessment process, and you pay any income tax owed by 31st January each year.

If you set up a company, your personal finances and those of the company are completely separate entities. So, before any money can be allocated to shareholders or employees, the company itself must pay Corporation Tax on any profits made.

Currently, the Small Profits' Corporation Tax rate is 20% (2014), assuming your turnover is £300,000 or less per year. This tax is payable 9 months and 1 day following the end of the period for which the corporation tax returns have been produced.

VAT

If your turnover has reached £81,000 (2014) or more during the year, you must register for Value Added Tax (VAT), whereby you must charge VAT on your products or services, and repay any taxes collected to HM Revenue and Customs, generally on a quarterly basis. You'll need to register to collect VAT whichever type of business structure you use - self employed or limited company - if your turnover reaches the £81,000 mark. For more information, why not read out  VAT Registration Guide here. 

Most Limited company contractors, with few business expenses, often register their company for the flat rate VAT scheme, an incentive introduced by the government to help simplify tax. For more information on the Flat Rate VAT Scheme, along with the advantages and disadavntages of using the scheme, click here to read our comprehensive guide. 

National Insurance

Self employed individuals and limited companies (and their employees) pay different types of National Insurance Contributions (NICs) altogether.

Self employed workers pay Class 2 and Class 4 NICs, whereas limited companies, and their employees pay Class 1 NICs.

If you're self-employed, you must pay £2.75 per week (Class 2 NICs), unless you have very low earnings. Class 4 NICs apply to your annual profits, and are payable at self-assessment time. You'll pay 9% on profits between £7,956 and £41,865 per year, and 2% on any profits made above this threshold.

For limited companies, both the company itself, and its employees pay Class 1 NICs on salaries of more than £153 per week. After this threshold, the company pays NICs of 13.8% on salaried income, and employees pay NICs at a rate of 12% on salaries up to £805 per week, and at 2% thereafter.

You should note that NICs are only payable on salaries, not dividends. This is the most important reason why the limited company route is more tax efficient than being self employed.

Naturally every contract is different, so we advise all SJD clients to to speak to their dedicated accountant who understands the needs of Limited company contractors, who can advise you on setting up a salary and payments through dividends. For for more information, read SJD's Guide to Dividends here.  

Income Tax

As we mentioned earlier, if you're self employed, you and your business are viewed as 'one' entity by HMRC when it comes to taxation. You pay income tax via the annual self-assessment process.

The limited company route is more tax efficient from a personal tax point of view, as you will typically take a small salary (with little tax liability) and the remainder of your income in the form of dividends (which are free from National Insurance).

Like self employed individuals, all company directors have to complete a self assessment tax return each year. This is when you pay any outstanding personal taxes you may owe on dividends and any other income you may have earned during the year. Don’t forget, your company is taxed separately from you, as a director. Visit our Contractor Tax page for more information on Limited company tax. 

Accounting

Whichever business structure you use, you are obliged to keep accurate business records. You may not necessarily use an accountant if you are self employed with a small number of transactions, however almost all limited companies hire accountants.

Although limited companies have more complex accounting needs, a specialist accountant will look after all of your accounts and statutory obligations, so - despite what you may have heard - dealing with tax issues really isn't a big deal. You will also pay significantly less tax than you would as a self employed individual.

SJD support over 15,000 Limited company contractors, freelancers, consultants and interims with all their company and personal taxation needs. For an all inclusive fixed fee package starting from £120 plus VATper month, all clients receive: 

  • Unlimited face to face meetings across the UK. Tax is complicated and sometimes only a meeting will do, which is why we offer unlimited face to face meetings across the UK.
  • Your own dedicated accountant. No call centres, no outsourcing, no automated call handling. Simply telephone, email or meet your own dedicated accountant* face to face.
  • Money back service guarantee. All your telephone calls and emails will be answered the same day or we will make a full refund of that months fee.
  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market.

Check our packages for more detail.

If you would like to appoint SJD as your accountants, or have further questions on going Limited, speak to a member of our new client services team on 01442 275789 or email jaime.thorpe@sjdaccountancy.com

For more information on making the move from self-employed to Limited, why not read our guide on: Making the move from Self employed to Limited.

You may also find the following guides useful:

SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
  • UK's Largest contractor accountants with more qualified staff. No call centres, no outsourcing, no automated call handling. Simply telephone, email or meet your own dedicated accountant face to face.
  • Money back service guarantee. All your Emails received by 4pm on any normal working day will be answered the same day. Should it be necessary to leave a telephone message it will be answered same day/following day latest or we will make a full refund of that months fee.
  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market, including: Best Accountant for Contractors, Accountant of the Year and Best Professional Service Team to name just a few.
  • All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee starting from £120 plus VAT per month. Check our packages for more detail.

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on 01442 275789 or email: janice@sjdaccountancy.com. Our new client services helpdesk is open Monday to Friday (8am to 6pm).

Appoint SJD Accountancy and never worry about your tax or accountancy affairs again.

Form your own Limited company with SJD - our same day online company formation service includes company bank account set up, VAT/PAYE registration and advice on optimum share structure. 

You may also find the following pages, guides and case studies useful:

*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.