Changing from Sole Trader to Limited Company

If you’re changing from sole trader to limited company, you need to consider how this new structure will affect your overall business. This is especially true when it comes to the financial side of things. Becoming a limited company comes with its own set of unique benefits.

At Newnham & Son, we have extensive experience advising clients on how to set themselves up as limited companies. With this in mind, we would like to highlight some of the aspects you need to be aware of when making the switch.

When Should You Change from Sole Trader to Limited Company?

When you’re starting off, it’s normal to set yourself up as a sole trader. Aside from being easier, you’ll have a much lower administrative burden, thus giving you more time to focus on your trade. But, there comes a time when changing from sole trader to limited company is a must.

Once your cash flow increases, you will find that becoming a limited company from a sole trader will allow you to legally cut down on the amount of tax you pay. Moreover, this business structure is often more attractive to potential customers or clients.

As a rule of thumb, we recommend you change from sole trader to limited company once your profits reach more than £30,000 a year. From then on, it’s likely that the savings you make on taxes will outweigh the costs of running a limited company.

Setting Up a Limited Company

In addition to tax benefits, changing from sole trader to limited company gives you greater borrowing power and allows you to make the most of limited liability. Here are some other aspects you need to keep in mind:

No Personal Responsibility

By becoming a limited company from sole trader, you’re no longer personally responsible if someone makes a claim against your company or if the company itself makes a loss. This does, however, mean that all your business finances need to be in the company’s name.

While you don’t legally have to, we recommend that you set up a separate business bank account. This should be in the name of your limited company. If you do use the same account as when you were a sole trader, you may face some heavy tax consequences.

Different Income Process

As a limited company, you will receive your personal income in the form of salary and dividends. Your salary will count as an allowable business expense. Your dividends will come from the profits of the company once you pay your corporation tax. This is because you will act as a director and shareholder of your company.

sole trader to limited company income

Business Expenses Vary

When changing from a sole trader to limited company, you’ll realise that business-related expenses work slightly differently. In short, you can claim tax relief on far more expenses as a limited company than as a sole trader. We will tell you more about business expenses in our up-and-coming blog posts.

Transferring Your Assets

As a limited company, you can transfer business assets that you bought as a sole trader. However, depending on the number and cost of these assets, you may face some tax implications. With this in mind, it’s essential that you speak with your local account before making the transfer.

Corporation Tax

As a sole trader, you pay income tax. You also have to pay National Insurance Contributions (NICs). This can add up to more than 40% of your salary in some cases. Luckily, as a limited company, you pay corporation tax which stands at 19% in 2019/2020. This means your tax bill could be smaller as a limited company compared to as a sole trader.

It’s worth mentioning, however, that you will have to pay personal tax on your salary and dividends. That said, with the right financial advice, you can minimize the amount of tax you pay in a legal way.

Choose the Right Accountant to Support Your Limited Company

The key to changing from sole trader to limited company in the UK is to work with the right accounting firm. The truth is, many avoid setting themselves up as a limited company because of the hassle that comes with the process. But, thanks to advances in technology, there is no reason for the administration of your company to be overly daunting.

With the above in mind, make sure to work with a firm that stays up-to-date with the latest technological advancements and that understands the importance of HRMC’s Making Tax Digital (MTD) strategy. At N&S, we can not only help set you up as a limited company but, we will ensure that you are MTD-compliant every step of the way.

To find out more about our services and how we can help you, contact us today. One of our friendly team members will be happy to answer any queries you may have.

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