Sometimes it can seem confusing, should you trade in your own name as self-employed or should you incorporate a company.
Here is a simple table to show you the differences:
| Limited company | Self-employed |
| Director’s salaries are paid under PAYE and depending on the salary paid and so employees national insurance and income tax will need to be deducted. | As someone who is self-employed you can use all the income and profits of the business; it is your own money.Class 2 national insurance is paid at a flat rate. |
| Employers national insurance may be due. | No employers national insurance is paid by a self-employed. |
| Company profits are charged to corporation tax. The small company rate of 20% applies to profits up to £300,000 | Profits are charged to income tax at a rate that increases with profits. The rate starts at 20% and increases to 40% and 50%.Profits are also subject to class 4 national insurance of 9% which reduces to 2% on profits over £42,475 (in 2012-13). |
| Many perks or benefits are subject to income tax and national insurance. | Perks and benefits are taxed as drawings from the business and are treated in the same way as profits subject to income tax and national insurance. |
| Dividends can be paid out of the profits of the company. | The self-employed cannot pay dividends. |
| Company money is distinct from personal money and money can only be taken out of the company as salary, reimbursement of expenses or as a dividend. | There is no legal difference between the business money and your own. |
| Some tax reliefs such as goodwill, research and development and intellectual property are only available to companies. | These reliefs are not available to the self-employed. |
| Directors are entitled to some state benefits such as maternity leave, job seekers allowance (soon to be replaced by universal credit) and state second pension. | The self-employed are not entitled to the same state benefits as they pay national insurance at a lower rate. |
| If you want to raise funds schemes such as Enterprise Investment Allowance and Seed Enterprise Investment Scheme are available. | These schemes are not available to the self-employed. |
You may find the information in my article “Should I be self-employed or set up a limited company” also helpful.
You can also compare how much tax you will pay using our tax calculator