Ltd Co v Sole Trader comparisons - strange results

Have got some apparently strange results comparing tax working via Ltd Co compared with sole trader

Didn't find your answer?

I have been comparing the basic tax position for a client trying to decide correct structure for his business. Person will be on their own so sole trader or sole director. Salary 9,100. Have compared the tax positions for both entities based on net profits before Director salary and tax of 75,000, 100,000, 125,000 and 150,000.

I am getting a positive result for the Ltd Co route (less total tax and NI to pay) on 75,000 and 125,000

I am getting a positive result for the Sole Trader route on 100,000 and 150,000

I know the marginal rate of CT gradually increases as profits increase but still just seems an odd result that I am trying to make sense of.

Could anyone kindly help? 

Replies (56)

Please login or register to join the discussion.

avatar
By Bobbo
13th Nov 2023 14:40

Providing your calculations would be a start.

Thanks (2)
avatar
By rmillaree
13th Nov 2023 14:56

that might be correct - without calcs anything is possible though

Nowt would surprise me - its clear that at outset one can earn more via company before higher rate tax takes effect - so wouldnt be a huge surpirse if calcs pivot once they go a certain amount into h rate or certain amount above level at which they start losing persoanl allowance. So without doing calcs it doesnt seem obviously odd that this "could" be the case.

Thanks (0)
By ireallyshouldknowthisbut
13th Nov 2023 14:58

I modelled it in £10k steps as it was too flippin hard to do in my head from £20k to £150k and then some above.

I made it better as sole trader at £100k by about £1,200 and about par at £150k assuming full extraction.

The sweetest point for ltd co. was £60k.

But so many assumption in the modelling. Reality is with a Ltd co you would not choose to burn your SA allowance two years in a row, but would peg under £100k and then go over the next perhaps.

Gone are the days when its a no brainer over £30k.

Building an excel model of it all I think is valuable as it helps you understand the maths and the "whys" which then feed into the advice side of things. not sure my model is particularly solid, but its a close approximation for most clients.

Thanks (0)
Ivor Windybottom
By Ivor Windybottom
13th Nov 2023 16:35

Agree that self-employment is often tax efficient now.

More importantly consider whether incorporation will be desirable if the public filing of the full P&L becomes compulsory (https://www.accountingweb.co.uk/business/financial-reporting/filing-shak...). That may be a bigger factor against incorporation for many smaller businesses.

Thanks (2)
Replying to Ivor Windybottom:
By Charlie Carne
15th Nov 2023 10:46

It appears that there has been a last-minute change and s56 of the Economic Crime and Corporate Transparency Act includes provisions allowing the Registrar to make the profit-and-loss accounts of small or micro-entities (or parts of them) unavailable for public inspection. (albeit that the P&L will still need to be filed so that Companies House can use its new powers to verify them).

Thanks (2)
Replying to charliecarne:
avatar
By rmillaree
15th Nov 2023 10:57

have they been listening to my rants and acted ?(that would be a first)

i would worry that the fact they are allowed to doesnt mean that they will (unless member of parliament is involved)

Thanks (0)
Replying to charliecarne:
By petersaxton
15th Nov 2023 11:10

"56 Use or disclosure of profit and loss accounts for certain companies"
Certain companies only

Thanks (0)
Replying to charliecarne:
avatar
By More unearned luck
15th Nov 2023 12:47

It seems to me that s 56 allows the Register to not to publish a company's P&L a/c as a result of special pleading by the company. Or that the Registrar on his own initiative could, say, exempt particular types of companies (eg flat management companies, perhaps). I don't think that the Registrar's powers in s 56 or in any related regs will or can be used to provided a blanket continuation of the status quo.

Thanks (1)
Replying to More unearned luck:
By Charlie Carne
15th Nov 2023 13:18

s56 (1) states:
"The Secretary of State may .... make provision requiring the registrar...not to make available for public inspection profit and loss accounts, or parts of them [for micro-entities and other small companies]....[or] to refrain from disclosing such accounts, or parts of them, except in specified circumstances"

My interpretation of sub-section (1) is that, if the SoS applies this rule, it will apply to all small companies and micro-entities and the exceptions listed in sub-section (2) are to determine who can apply to override the default non-disclosure and require disclosure. It won't be up to each company to apply for permission for their P&L not to be disclosed.

I assume that the reason that this clause allows for the SoS to require the default non-disclosure position is so that this position can be reviewed and any future SoS can change their mind (requiring disclosure as the default) without the need for new primary legislation.

Sub-section (1)(a) specifies non-disclosure only of the P&L of micro-entities and other small companies, while sub-section (1)(b) seems to cover any company's full accounts but only in "specified circumstances". We await secondary legislation for clarification, but I would hope and expect that (1)(a) will be implemented prior to the Act taking effect (meaning that our small and micro company clients would not have their P&L disclosed) and that they have an idea already of the type of circumstance in which (1)(b) would apply, but that this would not cover a typical small trading company.

Thanks (0)
Replying to charliecarne:
By petersaxton
15th Nov 2023 13:29

So why does the title of the section say "certain companies"?

Thanks (0)
Replying to petersaxton:
avatar
By rmillaree
15th Nov 2023 13:35

some companies will not be small or medium companies - so large company is potentially treated different.

Thanks (0)
Replying to rmillaree:
By petersaxton
15th Nov 2023 14:04

they are not referring to large companies at all

Thanks (0)
Replying to rmillaree:
By petersaxton
15th Nov 2023 14:11

"(2) Regulations under subsection (1) which provide for the making of an application may make provision as to—
(a) who may make an application;
(b) the grounds on which an application may be made;"

The reading of the section, and particularly the part of subsection above, makes it obvious they are are talking about an application for individual companies and not a general ommission of profit and loss accounts.

Thanks (0)
Replying to petersaxton:
avatar
By rmillaree
15th Nov 2023 15:04

"The reading of the section, and particularly the part of subsection above, makes it obvious they are are talking about an application for individual companies and not a general ommission of profit and loss accounts."

I am not offering any opinion on what is being said here in the body of the text i am firmly standing on the fence in that regard . i was simply statingb that imho the "certain companies" bit at the top could easily be referring to "small/medium sized" companies. Clearly those company types are a subset of the full set of companies that exist.

Thanks (0)
Replying to rmillaree:
By petersaxton
15th Nov 2023 15:17

They are ALL the companies referred to in the subsection.

Thanks (0)
Replying to petersaxton:
avatar
By rmillaree
15th Nov 2023 15:26

i think this argument is pointless - i dont get your point whatever it is i am not even sure i am disagreeing with you - does it really mater whats in the title anyway - lets agree on that its the body of the text that matters? -in that regard i am fence sitting. I would concede my reading of what it says in the title might be off point - in that regard the title doesnt really give us much to go on

Thanks (0)
Replying to rmillaree:
By petersaxton
15th Nov 2023 15:46

When the time comes you will see that all companies will have to disclose their profit and loss account.
Only madmen would produce legislation to disclose the profit and loss account but come up with other legislation to say they can decide to not publish the profit and loss account when they can just amend the former legislation.

Thanks (0)
Replying to petersaxton:
avatar
By rmillaree
15th Nov 2023 16:00

i wont comment on the ability of hmrc to employ madmen when it comes to writing new legislation.

Thanks (3)
Replying to rmillaree:
By petersaxton
15th Nov 2023 16:01

I doubt this is anything to do with HMRC.
My point still stands

Thanks (0)
Replying to petersaxton:
By Ruddles
23rd Nov 2023 11:10

But your point is still less than clear. The heading to the section refers to "certain" companies - quite clearly that means that it does not apply to all companies. The body of the section then makes it quite clear that the companies in question are small/micro.

Thanks (0)
Replying to Ruddles:
By petersaxton
24th Nov 2023 09:47

So you think they would produce one piece of legislation that requires all small and medium companies to produce a profit and loss account and around the same time produce another piece of legislation that would exempt ALL small and medium companies to not produce a profit and loss account?
Why not just remove the legislation that requires all small and medium companies to produce a profit and loss account?
It's clear to me that the legislation to exempt a company from producing a profit and loss account is for a decision to be made to exempt individual companies from producing a profit and loss account.

Thanks (0)
Replying to petersaxton:
By Ruddles
24th Nov 2023 10:20

petersaxton wrote:

It's clear to me that the legislation to exempt a company from producing a profit and loss account is for a decision to be made to exempt individual companies from producing a profit and loss account.

Then I would suggest that you have misunderstood the legislation.
Thanks (0)
Replying to Ruddles:
By petersaxton
24th Nov 2023 11:13

I disagree.
Why would they introduce TWO bit's of legislation?
One to require ALL small and medium companies to produce P&L a/cs and one to not require ALL small and medium companies to produce P&L a/cs?

Thanks (0)
Replying to petersaxton:
By Ruddles
24th Nov 2023 11:33

I suggest that you go back and read the legislation again. Carefully this time. Because it most definitely does not say what you appear to think it does.

Thanks (1)
Replying to Ruddles:
By petersaxton
24th Nov 2023 14:04

How does it most definitely not say what I think it does?

It even talks about who may make an application. If you were right, why should anybody need to make an application? The SofS would just make a regulation.

"Regulations under subsection (1) which provide for the making of an application may make provision as to—
(a)who may make an application;
(b)the grounds on which an application may be made;
(c)the information to be included in and documents to accompany an application;
(d)the notice to be given of an application and of its outcome;
(e)how an application is to be determined;
(f)the duration of, and procedures for revoking, any restrictions on the making of information available for public inspection or its disclosure."

Thanks (0)
Replying to petersaxton:
By Ruddles
24th Nov 2023 15:17

It's quite simple. One provision requires small and micro-entities to file full accounts. Another allows the SoS to make provision for non-disclosure of the P&L etc as filed by the entities. That is NOT the same as saying that those entities do not need to produce/file the information in question.

But as you are making something out of nothing, I'll leave it there.

Thanks (0)
Replying to Ruddles:
By petersaxton
24th Nov 2023 17:03

It's nothing to do with the secretary of state.
The applicant will be somebody connected to the individual company involved.
I've written to the proposer at the House of Lords so I will tell you what he says.
"But as you are making something out of nothing, I'll leave it there."
Whether an individual company doesnt have to publish a profit and loss account or whether ALL small and micro companies have to publish a profit and loss account I'm sure that most business people and accountants do not consider it nothing. As long as people dont understand legislation it is always worth explaining it to them.
s56 refers to "certain companies" and goes on to refer to:
section 443A (micro-entities), or
section 444 (other small companies)" which indicates the schedule refers to individual companies and not ALL companies.

Thanks (0)
Replying to petersaxton:
By Ruddles
24th Nov 2023 18:13

Sigh - we know that it doesn’t apply to ALL companies because it applies only to small and micro-entities. I really don’t understand why you are having so much difficulty with the meaning of “certain”.

And I don’t know why you think it has nothing to do with the Secretary of State given those are the very first words in the section.

And companies do not publish accounts (in this context). They file accounts and all companies will be required to file “full” accounts. Whether or not the Registrar will then need to publish the detail of certain companies may be subject to regulations made by SoS.

It really isn’t that difficult a concept.

Thanks (1)
Replying to Ruddles:
By petersaxton
24th Nov 2023 19:11

I said right at the beginning we were talking about only micro and small companies. You seem to think that the SofS will reverse an Act of Parliament by regulation.
The SofS will decide on an application by the applicant:
“Regulations under subsection (1) which provide for the making of an application may make provision as to—
(a)who may make an application;”
Why is there an applicant if you think the SofS makes the application?
What is obviously a difficult concept for you to understand is that the SofS will not decide to not require the publication of the profit and loss accounts for all micro and small companies. The SofS will review an application by certain persons for the company related to them to not have to publish the profit and loss account of that company.
The nonsense you came up with regarding filing and publshing is strange. The registrar will file/publish whatever the company submits if it is within the law. Why do you say that companies will be required to file "full" accounts? The Registrar will not take the accounts and publish only part of them. The company will file/publish the accounts that are required.
The main difference is simple:
You think the SofS may decide that ALL micro and small companies will not be required to file P&L a/c's in the same Act that says that ALL micro and small companies will be required to file P&L a/c's!
I think that under s56, applicants for individual companies will apply to not have to file P&L a/c's.
If you think I am wrong then who do you think these applicants will be?

Thanks (0)
Replying to petersaxton:
By Ruddles
24th Nov 2023 19:33

The legislation says that the Registrar may not have to publish the accounts, or parts of them, that have been filed. So your statement that the Registrar will/must publish what has been filed is wrong.

The legislation refers to by application or otherwise. Do you understand what “otherwise” means?

Since you accept that we are talking only about small and micro-entities, ie not all companies, just what is your issue with the word “certain”?

Don’t answer. I’m done here.

My parting words are that you would do well to read up on the difference between primary and secondary legislation.

Thanks (0)
Replying to Ruddles:
By petersaxton
25th Nov 2023 07:14

The applicant would be the person who doesnt want the profit and loss account published so it would be ridiculous to think they would submit the companies profit and loss account.
"otherwise" means by some other way. Isn't it obvious? Why ask?
"certain" means "individual" not all. People will apply to not have their company's accounts showing the profit and loss account.
"Don’t answer. I’m done here."
Please dont tell me what to do.
Does "I'm done here" carry as much weight as "I'll leave it there."?
"My parting words are that you would do well to read up on the difference between primary and secondary legislation."
That's a nonsense statement. You know very well I know the difference between primary aand secondary legislation. You are just resorting to childish comments.

Thanks (0)
Replying to charliecarne:
avatar
By More unearned luck
16th Nov 2023 11:07

S 484A (1) permits the SoS to make regulations on how the discretionary non-publication of P&L a/cs is to be operated. That is the extent of his/her involvement in that matter (but see my next paragraph). Whether a company's request for the non-publication of its P&L will be heeded or whether the Registrar will of his/her own volition not publish it is nowt to do with the SoS.

The SoS does have the ability to defer s 56 coming into force. This section, like most of the Act, only becomes law when regulations to the effect are laid before Parliament (see s 219). The power to make the Regs referred to above is in force, but these can have no effect unless s 56 and hence s 484A is law.

I still say that the Registrar's 'or otherwise' discretion isn't wide enough to thwart Parliament's intention that small and micro companies' P&L a/cs are published.

Thanks (1)
Replying to More unearned luck:
By petersaxton
24th Nov 2023 12:04

S 484A (1)
What Act is this?

Thanks (0)
avatar
By Openhouse
13th Nov 2023 17:00

Many thanks
My figures were
Limited
75000 Profit
9100 Salary
65900 Profit after salary
13713 CT
52187 Left and paid in dividends

13713 CT
6929 IT
20642 Total Tax

Sole trader
75000 Profit
17432 IT
4522 NI (4343 + 179)
21954 Total Tax

Limited Co wins at 75000 profit

Limited
100000 Profit
9100 Salary
90900 Profit after salary
20338 CT
70562 Left and paid in dividends

20338 CT
13130 IT
33468 Total Tax

Sole trader
100000 Profit
27432 IT
5204 NI (5025 + 179)
32636 Total Tax

Sole trader wins at 100000 profit

Limited
125000 Profit
9100 Salary
115900 Profit after salary
26963 CT
88937 Left and paid in dividends

26963 CT
19332 IT
46295 Total Tax

Sole trader
125000 Profit
42432 IT
5887 NI (5708 + 179)
48319 Total Tax

Limited Co wins at 125000 profit

Limited
150000 Profit
9100 Salary
140900 Profit after salary
33588 CT
107312 Left and paid in dividends

33588 CT
28836 IT
62424 Total Tax

Sole trader
150000 Profit
53703 IT
6569 NI (6390 + 179)
60272 Total Tax

Sole trader wins at 150000 profit

So result seems to flip flop a bit depending on profit level

Thanks (0)
avatar
By Matrix
13th Nov 2023 20:15

Thanks for all this. Will check when I get a chance but there are many benefits to incorporating such as perception, limited liability, timing of profit extraction, exit strategy, R&D etc. The disclosure of more financial info may change this but I get the impression that many people just fancy owning a company.

Thanks (2)
avatar
By johnward
14th Nov 2023 07:32

Increase the director's salary for some of the profits over 50k?

Thanks (0)
Replying to johnward:
avatar
By rmillaree
14th Nov 2023 12:52

Increase the director's salary for some of the profits over 50k?

That may perhaps in theory be an option but practicably speaking the results normally arent what you would expect. Eg recalculatging via salary will likely make more of income subject to higher rate perhaps not solving the problem and thats ignoring employers ni that would likely aply to one man band.

Thanks (0)
By petersaxton
14th Nov 2023 09:08

It would be nice to see the results set out on a graph - no I'm not expecting anybody to do it!
Changes of tax rates are going to be wild for a few years so I would be very wary of placing too much reliance on one year's calculations.

Thanks (0)
Mark Lee headshot 2023
By Mark Lee
14th Nov 2023 18:23

"a client trying to decide correct structure for his business"

CORRECT?
Most appropriate given his plans and ambitions for the business?
Cheapest to run year on year?
Most tax efficient in 2023/24, if salary and dividends are managed carefully?
Most tax efficient regardless of prospective tax changes?

Other objectives may be in mind or appropriate to consider too.

Thanks (2)
avatar
By petercooperuk
14th Nov 2023 19:39

An easy way to think about it, in a broad sense and ignoring all the other factors of Ltd companies, is that someone who is self employed earning in the £50k-100k zone (say) is paying 40% income tax and 2% NICs at the margin for a total of 42% tax.

A Ltd company owner is (indirectly) paying 19% corporation tax first *then* 34% dividend tax on the margin (for a total of ~46.5% tax). The further you go, then, the more things swing in favour of the self employment situation in terms of take home (again, ignoring all other factors).

Just for fun I threw £1m of profit per year into one of those "dividend vs salary" calculators, and the total tax for the dividend route was 52.86% versus 45.88% for sole trader (as, of course, at over £250k, the company is paying the full 25% CT making it even less competitive).

Thanks (0)
avatar
By AndyFroggatt
15th Nov 2023 09:54

Thanks for the calcs and suggestions. For me the main area for discussion is how much is the owner going to draw out, when, options for drawing out in a different manner, different tax year......

Thanks (0)
avatar
By Sirocco123
15th Nov 2023 09:57

Surely the only case for a small business operating as limited liability company is to limit liability, tax advantages are being eroded at every opportunity ?

Thanks (0)
Replying to Sirocco123:
avatar
By rmillaree
15th Nov 2023 10:12

'

Thanks (1)
avatar
By petestar1969
15th Nov 2023 10:26

Hmm, its been like this for a while.

In the good old days, when dividends came with a tax credit, any profit above £50,000 meant Ltd company was always the best option and got better the higher the profit.

Since the change in how dividends are taxed, its more like a sine wave, as you have discovered.

BUT

As others have mentioned, deciding which vehicle to use for a business isn't just about the tax, is it?

Given the annoying new legislation coming in forcing all Ltd companies to publish their P&L accounts, I foresee fewer people taking that option.

Thanks (0)
avatar
By Pve
15th Nov 2023 10:58

Make as little profit as possible in your Ltd co by siphoning top line turnover into your private pension scheme, up to 60K p.a. it's the biggest gift from HMRC out there so use it. Also the advantage of a limited company is the ability to manage extraction of profits. You can build up a substantial amount of retained profits to draw down at lower tax rates when your income requirements are less for instance when your mortgage is paid off.

Thanks (2)
avatar
By agillies
15th Nov 2023 11:43

Generally I have found with higher profits is much closer than you think typically 2% to 5% in favour of Ltd

The devil is in the detail as these change the results:
Company gives flexibility of timing of payments and involving family via small salary/shares and plan against key personal marginal rates £50k £100k and £200k

Salary should be £12,570 to full NI Limit +some employment allowance might be available for extra salary
Electric car with little business can be a big advantage in Ltd co
Pension options/objectives/available unused allowances and lifetime limits
Small expenses perks can add up in Ltd company
Long term selling goodwill using Entrepreneurial relief - pros and cons

Thanks (1)
Replying to agillies:
avatar
By Latinaid
15th Nov 2023 16:42

agillies wrote:

Salary should be £12,570 to full NI Limit +some employment allowance might be available for extra salary

This would be a sole director, with presumably no other employees, so no Employment Allowance?

Thanks (0)
avatar
By Openhouse
15th Nov 2023 12:37

Thank you everyone .. interesting and helpful feedback

Thanks (0)
avatar
By Openhouse
15th Nov 2023 12:36

Thank you everyone .. interesting and helpful feedback

Thanks (0)
All Paul Accountants in Leeds
By paulinleeds
15th Nov 2023 15:39

Don't forget if you are a sole director or shareholder or something like that and you are working from home then you can always charge rent of around say £3,000 plus salary of £9,100 rather than paying the £12,570 salary. It will save a small amount of employers National Insurance.

If you own some equipment personally then, for the right type of companies, a charge to your company for the hire of this equipment can be helpful as it extracts profits, but no national insurance for either employee or employer. Every little helps at the margin.

Thanks (0)

Pages