Trading structure

It is important to get your trading structure right. Should you be a sole trader, partnership or limited company. These figures are for 2017/18.

Sole trader.

If you anticipate net profits of around £25k pa or less then sole trader will usually be your best option. It is the simplest way to trade and our our charges are low.

Partnership.

Suitable where profits are less than £25k pa x number of partners. You can split the profits as you agree. A separate partnership Return is required so our charges will have to cover this and the individual partners Returns.

Limited companies.

Consider this where profits exceed £25k pa x number of owners. The idea is paying out low salaries equal to the National Insurance (NI) threshold or personal allowance level then distributing dividends on which there is no NI.  From 2016/17 there is now a dividend tax but savings can still be made. Typical tax outcomes for 2017/18 are below. These are approximate amounts round to the nearest £50.

A short video comparing the figures on the table is below sole trader or company

Profit

£

Sole Trader

  £

Company  £Saving

 £

10,000300350-50
20,0002,9002,350550
30,0005,8004,850950
40,0008,7007,3501,350
50,00012,2509,8502,400
75,00022,75020,4502,300
100,00033,25031,8001,450
150,00058,85059,200-350

Trap.

The savings above mostly arise through National Insurance (NI) reductions. Remember NI employees contributions cease  once you reach pensionable age. Also NI employers contribution may be covered by the Employers allowance. NI Class IV are no longer payable once you are of pensionable age at the start of the tax year (6 April). Class II contributions will be abolished from April 2018.

 

Some of the other advantages are:

  • Limited liability.
  • Ability to carry forward undistributed profits.
  • Advantageous deductions available for mobile phones and staff entertaining.
  • Companies may be easier to sell or pass on to the next generation.
  • The corporation tax rate falls to 19% from 1 April 2017, and 17% from 1 April 2020.

There are also drawbacks:

  • More paperwork and our fees will be higher.
  • Possible IR35/Personal Service company complications.

This can be a complicated area so watch out.

 

Published 18 October 2017.

Updated 20 October 2017.