Ltd or Sole trader whilst employed

Ltd or Sole trader whilst employed

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Hi,

I'm employed part time (Health service) and my plan is to continue to work for 12 - 18 months whilst my new Accountancy business venture takes off. My initial thoughts were to set up as a sole trader in the first instance, but I'm actually wondering if I'd be better setting up as a Ltd company from the off?

I've done some searching and there are lots of articles on sole trader v ltd, but not so much on if you're also still working.

Any pointers gratefully received.

Replies (6)

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By thisistibi
04th Mar 2014 10:31

Not so simple

The answer is not simple, it depends on your circumstances (for example how much you currently earn and what the income from your new venture will be) and it makes sense to go to an accountant in order to have the situation assessed for your circumstances and to understand all the pros and cons of a ltd company.

 

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By SJBarrow
04th Mar 2014 10:55

Which is where my issue is, if I am wishing to set up as an accountant, shouldn't I be able to work this out for myself?

In simple terms, my current taxable pay after annual allowance is £26k.

I'm estimating a first year profit for my new business of £10k (for example), therefore as a sole trader, £6k would be taxed at 20% (taking me up to the £32k threshold) and £4k at 40%, my total earnings after tax for the sole trader business would be £7.2k.

If Ltd, assuming again that taxable profits were £10k, the company would pay 20% CT and the profits for distribution would be £8k, if this was taken as a dividend, I would receive £6k with no tax to pay and £2k at 32.5% as this would push me over the basic rate band, total income to me after tax would be £7.3k.

I am however intending to save the income from the first year to give me a buffer to enable me to cease employment. Therefore if I left the profits in the company I could take the dividend at a later date when I am not employed and not already using up my annual allowance etc... if however I am a sole trader, I will have to pay tax on it in the first year.

Does any of this make sense?

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Replying to Accountant A:
Stepurhan
By stepurhan
04th Mar 2014 11:05

Self-confidence

SJBarrow wrote:
Which is where my issue is, if I am wishing to set up as an accountant, shouldn't I be able to work this out for myself?
The brutal answer to this question is yes. Your clients are likely to ask re their businesses so you need to be able to provide an answer.

But it sounds like you are most of the way there already. You understand the likely tax consequences of the two options. You also understand the ability to keep profits in the company until such time as taking dividends would not attract higher rate. Basic tax planning to be sure, but tax planning nonetheless. I would guess you are also aware of the non-financial pros and cons of a company, such as limited liabiilty and benefit in kind issues.

So maybe you just need to take a step back, and try to appraise your calculations as if you were to present them to someone else. Would you advise them to incorporate in your circumstances? Do the other aspects affect the decision at all? My guess is that you will find you know the answer all along, and just need the confidence to make the final step.

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By Cathy R
04th Mar 2014 11:41

NIC

Don't forget Class 4 NIC!

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Stepurhan
By stepurhan
04th Mar 2014 12:08

Possible deferment

Whilst Cathy R is quite right to make sure it is not forgotten, deferment is possible. The Class 1 NIC paid through the ongoing employment should be enough to meet the requirements for this. You would need to apply for this deferment though, it is not automatic.

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By SJBarrow
04th Mar 2014 12:28

Thank you, I will look into the deferment.

I'm glad I'm on the right track.

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