Separate entity and limited liability of setting up a limited company UK:

Unlike self-employed setting up a Limited company UK is owned by share ownership or by directors and shareholders rather than by the only director even if directors founded the company. The director may own the proportion of the company and has share ownership capital rights. The director works as an officer of the company and manages the company’s shareholders’ interests. The director is not eligible for employee status automatically, national minimum wage, or government benefits such as tax credits.

A limited company is considered as a separate legal entity and has separate financial affairs i.e. bank account, ownership of assets, tenders, and contracts from its directors and shareholders and is accountable for its debts and liabilities. If a company is facing any financial difficulties due to any reasons, unless the directors and shareholders have not given any personal security for company debt, they will not be legally responsible for anything go wrong with the company, need not use their personal assets and finances to cover the company losses and will also not have any financial risk & have their personal assets secured as they have separate interests or finance from their limited company finance.

The directors would be accountable or responsible for personal bankruptcy for continuing the trading when the company is insolvent and due to which creditors are facing the financial loss.

Full liability and financial risk of self-employed:

As self-employed you and your business finances are considered as a single entity by HMRC or any other creditors, so if anything goes wrong with your business or business to become insolvent, you and your personal finance or assets will be used to recover any debts.


How do I pay myself as a Ltd company? or How can I take money out of my limited company without paying tax UK?

Limited company tax benefits UK:

Setting up a Limited company UK is taxed separately from its shareholders and directors as it is considered a separate entity from its shareholders and directors.

Directors and shareholders of limited company pay less personal tax i.e., income tax, dividends tax and Class 1 employees’ NIC on their earnings and benefits on self- assessment than sole trader by choosing to take out most of their earnings as dividends that do not attract NICs and paying less income to themselves that will reduce their NICs.

You can defer your income tax and dividend tax by retaining or reinvesting some of your profits that are also called shareholder funds in your business bank account for another use or to pay for future operational costs and growth, to earn interest, to distribute as dividends in the future tax year or to extract for the later tax year when the lower rate of personal tax is due.

Limited company pay corporation tax (that is much lower than higher individual personal tax or income tax rates) 19% on all profits that it makes annually. Read our latest guide on budget 2020 for the latest tax rates and allowance 2020/21.

What tax do I pay as a Ltd company and self-employed?

Self employed and limited company tax calculator:

For example, if your company makes a profit of £81,000 for the tax year 2020/21, your company would pay corporation tax at a rate of 19% as follows;

After subtracting the corporation tax from profits your company has leftover profit amount of £65,610 in its business account. You as a director can pay yourself salary up to a personal allowance of £12,500 (which will also be deductible for tax purpose in company account i.e., Corporation tax will be £81,000 minus £12,500 = £68,500 @ 19% = £13,015) and in addition to that dividend income up to £37,500 to protect yourself from paying higher band income tax at the rate of 40%. For example, you receive £50,000 from the company account to pay yourself salary and dividends and after subtracting the personal allowance £12,500 for tax year 2020/21 from the amount of £50,000.

The tax on dividend is Nil on first £2,000 and as basic tax rate band, the dividend is taxed at the rate of 7.5% for the tax year 2020/21 which is £2,001 to £37,500 dividend tax rate 2020/21

Dividend tax = £35,500 × 7.5% = £2,662.50

So as a basic rate income taxpayer, you will pay dividends tax £2,662.50 on the dividends that you receive from your company and will not pay any income tax on your personal income amount of £12,500 that you pay yourself (Employee National Insurance £360 payable). Your company will pay corporation tax £13,015 on the total annual profits of the company. After subtracting the amount of corporation tax and dividend income you will still have profit £17,985 (Net profit £68,500 minus Corporation tax £13,015 minus dividend income £37,500), you can retain this profits or shareholders’ funds in a company bank account and that you can extract in the later year when the low tax rate is due or can use it to earn interest or use to pay for business operational costs and growth in future and invest in pensions. In this way, by setting up a limited company UK you can save more tax by paying yourself less salary and more dividends in a tax-efficient way and with better tax planning and getting benefits of tax-deductible items.

Self-employed tax calculator and tax implication:

As a self-employed you and your income, tax affairs and expenditure are considered as one. So, you have to pay tax, NIC 2 and NIC 4 on all profits that you make annually and on your personal income. Self-employed relatively pay a higher tax than a limited company, cannot defer or retain their profits like a limited company for tax saving, and cannot claim for tax relief. Proceeding the above example, you pay income tax at the rate of 20% on first profits of £18,500 (£31,000 minus £12,500) after deducting the allowance and class NIC 2 and class NIC 4 at the current rate and you must pay tax at the rate of 40% on next profits above £50,000.

Loaning facility and investment:

If you have a Limited company with proven records of healthy profits and retained profits from Companies House, you can obtain loans or raise your funding from bank or investors by providing limited liability protection as a separate entity and banks also sometimes prefer to give loan to the limited company rather than to self-employedThe limited company provides directors or shareholders to sell or transfer their share to other shareholders or new investors to raise company capital by getting shareholder’s agreement if the company has more than one shareholder more easily than self-employed.

Limited company permitted the director to borrow money or interest-free loan from company bank account under certain limitations by Companies Act 2006. If the director doesn’t repay the full loan amount within nine months after withdrawing the loan amount from a limited company bank account, the company will be liable to pay tax at the rate of 32.5% on the overdue loan amount. Director will be taxed on interest-free loans depending on beneficial loan interest. Read our blog on directors’ loan account.

Professional image and naming protection:

A limited company is a legally registered entity with Companies House or has naming protection by Companies House that gives a more professional look to a limited company rather than to sole trader who has not such type of naming protection or legally registered and cannot prevent anyone to use the same name for their business.

Setting up a limited company UK increases your professional image and credibility, which helps to grow your network in different markets, to create valuable brand identity, to get a wide range of targeted opportunities, and create a good impression. Moreover, larger companies and new investors also prefer to do business with limited companies and award contracts to limited company’s contractors as limited companies provide them limited liability protection or insurance against the high-level risk involved with their contracts that they award to the company.

Self-employed would not be considered to award such type of contracts by larger companies that involve high risk or inner client’s policies because self-employed have not registered business name to give insurance to their clients against their contracts.

Cros of limited company: More filing requirements of forming a limited company 

To form a limited company, you have to choose the company name and then need to register it with the Companies’ House. Having a limited company involves more paperwork, complex administration work or accounting, and more account details. You have to file your company’s annual accounts, company self-assessment tax return, and corporation tax return to HMRC and Companies House and confirmation statement to Companies House. As a director, you have to file your own annual self-assessment tax return of your personal income declaring your salary and dividends on them that you receive from the company to pay the tax due on your salary and dividends. You have the statutory account filing responsibility to HMRC such as profits and loss accounts, director’s report, auditor’s report (only for medium or large companies), balance sheet, and notes to the accounts. Generally, the accountant’s fee is higher if you are doing business under a limited company.

Do I need an accountant if I have a limited company? Or Can I prepare my own limited company accounts?

As the company involves complex filing requirements and accounting details, it would be suitable to hire an accountant to get expert advice on your company accounting matters, tax-saving matters and for filing your company or personal accounts. Our qualified and expert Berkshire accountants will fulfil your accounting and taxation needs on individual and business levels with their accounting expertise. You can get guidance from our article for your company filing requirements.

Less Filing requirement of self-employed:

To start as self-employed, you just need to register yourself with HMRC and you have less paperwork or administrative work and have basic annual account filing requirements or to HMRC not to Companies House rather limited company that has more administrative work or filing requirements. In short as self-employed you just need to file your annual self-assessment to HMRC.

Privacy of records of limited company and self-employed:

As limited company registers with Companies House and provide all business records, directors and shareholders details to Companies House that are on the public record and have minimum privacy rather than self-employed who have maximum privacy as they don’t have their registered business with Companies House. However, a Limited company can file FRS105 (if qualifies) which has a small disclosure to avoid disclosing unnecessary information publicly.

How much does an Ltd company cost and self-employed?

Costs of setting up a limited company UK is preferably higher than startup cost of as self-employed. Self employed can register online with HMRC free of charge and setting up a limited company UK have to pay to register with Companies House which may cost £50 plus vat approximately.

Pension scheme:

Running a limited company, directors or employees can use company pension schemes and invest money in it to save personal and business tax.

Business expenses:

Whether you are self-employed or employer and director or employee of a limited company, you can claim for expenses that you incur on business purchases such as purchasing a company car for only business purpose, stationery, electricity, and business equipment or to use them only for a business purpose, not for personal use. Read our blog on how you can reclaim VAT on company car.

Is it worth becoming a limited company?

You can get a clear idea by reading the above points that which business structure suits you better whether you have to start as a limited company or self-employedSetting up a limited company UK would be more beneficial rather than self employed if you have healthy profits.

After reading the above, if you still have questions, please contact our team of Berkshire accountants on which business structure will suit your business industry by clicking here.


Disclaimer: Please note the information in this blog above is for information only. It must not be used as advice to act upon and any specific questions should be discussed with one of our staff at Berkshire Accountants Limited.