Sole Trader Vs Limited Company

When starting out on your own, it can be quite daunting! Registering at Companies House for your business makes it all real. Many people that are starting up chose to become a sole trader for ease as its less of an administrative burden than being a limited company business.

There are many benefits of staying a Sole Trader such as not having to pay Corporation Tax and still being able to offset certain purchases against your profits to reduce your personal tax. You should always speak with your accountant regarding tax as you need to be sure that you are claiming all the correct tax relief.

On the other hand, becoming a limited company also has many benefits that should be considered. One of the main areas for consideration is the liability risk.  As a sole trader you are ultimately liable for everything that happens within your business, so if you have an unhappy client who decides to sue you, your personal assets could be at risk, henceforth moving to a limited company offers you protection for you and your family.

You should consider the differences:

Sole Trader Limited Company
You can trade using your own name or another name. There is no need for this name to be registered. You must choose a unique business name to register.
Unlimited liability – you are held personally responsible for business debts and legal disputes

If your business fails, you are at risk of personal bankruptcy.

Limited liability – the company is held responsible for business debts and legal disputes (limited exceptions apply)

If the business fails, the company is at risk of insolvency (i.e. corporate ‘bankruptcy’), not the shareholder(s) or director(s)

Owned by one person only Can be owned by one or more people, who are known as ‘members’ or ‘shareholders’

Managed by one or more people, who are known as ‘directors’

All business income belongs to you Business income belongs to the company until it is transferred to you as:

  • a director’s salary
  • expenses
  • shareholder dividends
You pay Income Tax (20-45%) and National Insurance contributions (Class 2 and Class 4) through Self-Assessment on all declared business profits above your tax-free Personal Allowance (PA) You pay Income Tax and Class 1 National Insurance contributions (NIC) through PAYE on your director’s salary (above your PA)

You pay dividend tax (7.5%-38.1%) through Self-Assessment on dividend income above your PA and the £2,000 tax-free Dividend Allowance. These tax rates are lower than Income Tax rates

The company pays a flat rate of 19% Corporation Tax on all taxable profits. This is lower than Income Tax rates.

You can minimise your personal tax and NIC liabilities by taking a lower salary and higher dividends

No information about you or your business is made available to the public by HMRC Company information is a matter of public record, including accounts and certain details relating to directors and shareholders
No legal requirement to keep or submit accounts, though it is beneficial to do so It is a legal requirement to prepare annual accounts for Companies House and HMRC
Tax relief on mobile phones and computers will be apportioned according to business and private use – an add-back of capital allowances will apply Mobile phones and computers are tax-free if they are purchased by the company

More tax-free benefits available through a company, including parking charges, public transport, travel costs, health checks, eye tests and prescription eyewear, childcare, and school fees


Can I change from being a Sole Trader to be a Limited Company?

If you would like to convert from being a Sole Trader to a Limited Company, the first thing that you need to do is register your business at Companies House, you need to make sure that you have decided on what your business name is going to be.  If this is something that you would like us to help you with we have a team of people that can work with you on this.

Next you need to inform the HMRC that you are no longer trading as a Sole Trader, to do this you need to complete this online form, along with this you will need to submit your final Self-Assessment Tax Return for your Sole Trader business by the 31 January after the end of the year tax.

If you had any assets in your sole trader business you may need to transfer the ownership over to your new limited company.

Make sure you set up a company bank account as this keeps your business finances separate to yours. Finally you need to make sure that you register for PAYE (Pay as you earn)

If you would like to discuss this further with one of our advisers please get in touch, please give us a call on 01922 922050 or drop us an email

Claiming Business Expenses as a Limited Company

To help be more tax efficient (and let’s admit, nobody wants to be paying more tax than they have to!), Limited companies are able to claim tax relief on certain costs through business expenses, which helps to reduce your profits and Corporation Tax payments and therefore leaving you with a much better looking take-home pay. However, you can only claim expenses that are on HMRC’s green light list, and you also have to keep accurate records for your expenses for at least 6 years so they can be accounted for correctly.

Your company’s expenses can be paid directly from the business bank account or they can be paid by you personally – this will be a reimbursed from company funds, which you must keep records of every time you are reimbursed when you have paid for business expenses out your own pocket. Employees are also able to claim expenses, most company’s will have an expenses policy for this.

The primary rules of Limited Company business expenses

  1. You can’t claim for expenses that are planned to be used for business and personal use.
  1. You can only claim for expenses that are exclusively used during the everyday running of your business
  1. Business expenses can be paid from the company’s business bank account or can be paid personally which will then later be reimbursed by the company
  1. Most limited company expense can be offset against your company’s corporation tax, however there are some exceptions.
  1. Make sure you keep a thorough record of business expenses and running costs, ensure to include VAT receipts, just so you are able to justify and prove your actions if your business expense claims are ever queried or knocked back by HMRC.


HMRC is very clear on the golden rule that a business expense must be necessary and wholly and exclusively incurred as part of the daily running of your business.

There are 2 questions you need to ask yourself to know whether or not something is a business expense.

  1. “Did I buy this service/item because I need it for my business?” If yes, then this is a business expense.
  1. Is the service/item used solely for business?” If yes, then this is a business expense.


Typical expenses you can claim as a limited company:

  • Business insurance
  • Health check costs
  • Eye test costs
  • Marketing, advertising and PR costs
  • Accommodation costs
  • Childcare costs
  • Bank charges
  • Home office expenses
  • Gifts benefits for employees or clients
  • Professional subscription costs
  • Telephone and broadband costs
  • Mobile phone contracts
  • Annual staff party expenses
  • Travel and parking costs
  • Professional development expenses
  • Start-up costs
  • Salaries
  • Pensions
  • Entertainment expenses (with exceptions)
  • Office supplies and equipment
  • Professional fees
  • Company car
  • Hire purchase agreements


However, listed above there are many that come with exceptions, loopholes and complexities. For more information on claiming business expenses, visit the GOV website here.

If you would like to discuss your business expenses with our team, please get in touch by calling 01922 922050 or email us at

Are you Eligible for a Restart Grant?

On 29th March 2021 the Government announced the launch of The Restart Grant scheme that supports businesses in the non-essential retail, hospitality, leisure, personal care and accommodation sectors with a one-off grant, to reopen safely now that COVID-19 restrictions are starting to be lifted.

There are still many businesses that do not realise that they are able to apply for this grant, which is intended to help businesses that are reliant on delivering in-person services to the public to be able to re-open safely as set out in Boris Johnson’s roadmap on 12 April 2021.

There are one-off grants available for businesses to apply for up to £6,000 for non-essential retailers and up to £18,000 for hospitality, accommodation, leisure, personal care and gyms which will allow them to re-open.

You must apply for these through your local council.


Your business may be eligible if it is:

  • Based in England
  • Rate-paying
  • In the non-essential retail, hospitality, accommodation, leisure, personal care or gym sectors
  • Trading on 1 April 2021

Businesses excluded from the fund;

You cannot get funding if your business:

  • Is in administration, insolvent or has been struck off the Companies House register
  • Has exceeded the permitted subsidy allowance


Further information can be found on the Government Website Click Here

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