If you started your business as self-employed and your business has grown you may want to think about incorporating your business, your accountant or Clearways Accountants can help you with this review and vital decision.
Operating as self-employed is the simplest way to trade. No formalities are required apart from notifying HM Revenue and Customs. The main disadvantage is that you are personally liable for all the business debts; this means you could lose everything if your business fails. There are ways to protect yourself and professional idemnity insurance is advisable.
Operating as self-employed is most suitable if you do not take many risks, particularly if you are selling your own services, for example consultants, therapists, plumbers and electricians.
If you are self-employed you will pay:
- Class 2 national insurance (paid as a weekly amount and collected by direct debt);
- Class 4 national insurance calculated on your trading profits (paid twice a year);
- Income Tax calculated on trading profits (paid twice a year);
- PAYE on any employees you have and;
- VAT if you want or need to register.
The other alternative is to incorporate a limited liability company. The main advantage with trading through a company is that you are not personally liable for any business debts. Your liability is limited to the assets of the company.
Trading as a company is better if the business is more risky and if you are trading as a contractor your clients or agency will usually insist that you trade through a company before giving you work.
Once you have incorporated a company the only way you can take money out is by paying yourself a salary, a dividend or to reimburse expenses. There is more paperwork associated with a company but you may find that you pay less tax if you trade through a company – see our handy tax calculator.
If you trade through a company you will pay the following taxes:
- Corporation Tax on profits (nine months after your accounting year end);
- PAYE on your own and your employees’ salaries;
- VAT if you want or need to register and;
- Income Tax on your salary and dividends.
The decision on how to set up a business and start trading can be daunting so why not contact us and use our one hour free consultation to get some advice.