Many business owners ask “Would I be better off as a Limited Company?” or if already trading via a Limited Company the opposite question, “Would I be better off as a Sole Trader/Partnership?”.
As you’d expect its not a simple answer. But let’s look at both as tax on business profits, and then wider issues.
In terms of taxes on business profits, until recently there hasn’t been a lot to choose between an unincorporated business – Sole Trader or Partnership – versus a Limited Company. However two recent changes in the tax regime have altered the equation:
- Cuts to NI for Sole Traders and Business Partners – the main Class 4 NI rate for the Self Employed has reduced from 9% in 2023-2024 to 6% in 2024-25
- Increases in Corporation Tax – where a company makes over £50,000 profit, the Corporation Tax rate rises progressively from 19% to 25%
Taking a simple calculation, for 2024-25 the relative taxation for a Sole Trader versus a Single Director / Shareholder Limited Company is:
| Sole Trader v Single Company Director/Shareholder | ||||||
| Profit £ | Tax Limited Company £ | Tax Sole Trader £ | Company is more (less) by £ | |||
| 15,000 | 985 | 632 | 353 | |||
| 25,000 | 3,594 | 3,232 | 362 | |||
| 40,000 | 7,507 | 7,132 | 375 | |||
| 50,000 | 10,115 | 9,732 | 384 | |||
| 75,000 | 20,372 | 20,189 | 184 | |||
| 100,000 | 33,199 | 30,689 | 2,510 | |||
| 150,000 | 62,587 | 57,960 | 4,628 | |||
And a similar calculation for a Partnership versus a company with Two Directors / Shareholders is:
| Partnership v Company with Two Directors / Shareholders | ||||||
| Profit £ | Tax Limited Company £ | Tax Partnership £ | Company is more (less) by £ | |||
| 15,000 | – | – | – | |||
| 25,000 | 838 | – | 838 | |||
| 40,000 | 4,578 | 3,864 | 715 | |||
| 50,000 | 7,187 | 6,464 | 723 | |||
| 75,000 | 13,723 | 12,964 | 759 | |||
| 100,000 | 21,955 | 19,464 | 2,492 | |||
| 150,000 | 43,229 | 40,377 | 2,852 | |||
Assumptions:
- 2024/25 Tax Rates
- Directors salary £12,000
- No other income
- Extract all retained profit as dividend
- In the second example the shareholdings and salaries are 50:50
When looking at tables like this, it is important to be aware that any model is going to be fairly simple and standardised, and most people have other sources of income or variables in family and financial circumstances which mean they don’t align with all the assumptions.
It’s also important to note that there is no longer a “one size fits all” on the salary v dividend split for a limited company – in some cases the NI costs of increasing directors salary are now offset by reductions in Corporation Tax and that may slightly mitigate some of these differences.
But the trend is clear – generally in terms of trading profits a company results in higher tax bills.
Does this mean that a Limited Company is now a bad idea? Or that anyone running their business via a company should look at reverting to an unincorporated structure? “Maybe” is the answer in both cases, but the position is now more nuanced than it has been and business owners will need to consider tax costs in the wider context of the right structure for their business, for example:
- Limited Liability – this is a valuable protection, especially as businesses grow more complex and inherent risks increase. Almost certainly this is worth some increased tax expense.
- VAT and Business Rates Savings – achieved through having more than one entity, for example giving multiple vat thresholds or access Small Business Relief across multiple business properties.
- Image and market expectation.
- Segregation of business and personal finance.
- Flexibility in passing wealth through generations.
In summary, tax changes in the past couple of years have introduced new variables into the assessment of the best business structure, but it always was, and remains, a multi factorial decision, of which tax is but one part.
Part two of this article, next month, will look at the considerations for those already running companies, around salary and dividend mix.
