ICAEW.com works better with JavaScript enabled.
Exclusive

TAXGUIDE ICAEW KNOW-HOW

TAXguide 04/21: The incorporation question

Technical release

Published: 05 Feb 2021 Update History

Exclusive content
Access to our exclusive resources is for specific groups of subscribers.

This TAXguide is aimed at accountants in practice who want to provide their clients with simple signposts concerning which business structure will give rise to the lowest tax burden.

The last five years have seen changes to the taxation of small limited companies and their owners which have permanently changed our understanding of the relationship between the tax treatment of self-employed profits and of those extracted from a small limited company. This has undermined our ability to give simple signposting to clients about which structure is likely to provide the lower tax burden, which is an inevitable consideration for start-up and growing businesses in deciding which structure is more appropriate.

In this TAXguide, Rebecca Benneyworth sets out the current position with analysis of the different tax threads in operation, and considers where the picture may move to in the next few years if the UK Government intends to repay coronavirus debt through changes to the tax system.

This TAXguide has been written by Rebecca Benneyworth and edited by Philippa Vishnyakov.

1 Overview

The main changes to the taxation of small limited companies operating as owner-managed businesses were announced in the Budget of July 2015 and implementation started in April 2016. The changes were two-fold: the abolition of the gross-up mechanism for including company dividends in the income tax computation of the recipient, and the introduction of new rates of tax to be applied to dividend income. At present, policymakers have fought shy of introducing a different tax regime for dividends arising from owner-managed businesses or close companies, but that option remains available, although it would add further complexity to the income tax system.

Viewed alongside the planned reductions in corporation tax the move was largely neutral, although the reductions in corporation tax lagged behind the changes to dividend tax by one year, so for many there was an initial increase in their tax liabilities. The abandonment of the planned reduction of the corporation tax rate to 17% means that the end result, as of 2020, is a slightly higher tax burden for many small company shareholders compared to 2015, although the significant increase in the personal allowance and the higher rate entry point have without doubt largely mitigated this.

2 The current position 2020/21

2.1 Analysis of the various tax rates applying

Understanding the way in which the various tax rates apply to income (profits and dividends extracted) helps to understand where the system works in favour of limited company status for tax purposes and where it works against.

This varies quite markedly across the income scale, but for the self-employed individual the marginal tax rates are very simple, so these are dealt with first.

2.1.1 Self-employed individual – other than Scotland

The rates on a marginal £1 of income work as follows (of necessity this analysis must ignore Class 2 national insurance contributions (NIC) as this is a fixed sum irrespective of profit).

Income band Tax rate % Class 4 rate % Total rate %
£0-£9,500 0 0 0
£9,501-£12,500 0 9 9
£12,501-£50,000 20 9 29
£50,001-£100,000 40 2 42
£100,001-£125,000 60 2 62
£125,001-£150,000 40 2 42
£150,001+ 45 2 47

2.1.2 Self-employed individual – Scotland

As above, but this time using Scottish rates of income tax.

Income band Tax rate % Class 4 rate % Total rate %
£0-£9,500 0 0 0
£9,501-£12,500 0 9 9
£100,001-£125,000 62 2 64
£12,501-£14,585 19 9 28
£14,586-£25,158 20 9 29
£25,159-£43,430 21 9 30
£43,431-£50,000 41 2 50
£50,001-£100,000 41 2 43
£125,001-£150,000 41 2 43
£150,001+ 46 2 48

2.1.3 Limited company – on extracted profits (as dividend)

Scottish rates do not apply to dividends – these are taxed at rest of UK rates, so there is no difference here.

Income band Corporate tax rate % Dividend tax rate % Total rate %
£0-£17,901 19 0 19
£17,902-£61,728 19 7.5 25.07
£61,729-£123,457 19 48.75 58.49
£123,458-£154,321 19 48.75 58.49
£154,322-£185,185 19 32.5 45.32
£185,186+ 19 38.1 49.86

* applied to the post tax profits, assuming all distributed

Although it can be observed that there are some marked differences in marginal rates, it is very difficult to use these tables to analyse whether there is any overall benefit at the various levels of profit, as one needs to appreciate the savings (or reverse) already made at the various change points.

However, there is one key observation possible from the tables above. The point at which the self-employed taxpayer becomes a higher rate taxpayer is at the income tax higher rate entry point – currently £50,000 for a non-Scottish taxpayer. For the limited company taxpayer, however, it takes a considerable profit to reach higher rate tax on dividends, largely because these are no longer grossed up. So the marginal rates compare like this:

UK rate Scottish rate Ltd company rate Advantage Ltd vs UK Advantage Ltd vs Scottish rate
£12,501-£14,585 28% 29% 19% 10% 9%
£14,586-£17,901 29% 29% 19% 10% 10%
£17,902-£25,158 29% 29% 25.07% 3.93% 3.93%
£25,159-£43,430 30% 29% 25.07% 3.93% 4.93%
£43,431-£50,000 50% 29% 25.07% 3.93% 24.93%
£50,001-£61,728 43% 42% 25.07% 16.93% 17.93%
£61,729-£100,000 43% 42% 45.32% (3.32%) (2.32%)

It is also very common to pay a salary through a limited company, which can (depending on the amount) produce an overall tax saving (as the profits for corporation tax are reduced without the corresponding increase in income tax). There is more discussion of this point at 2.4 below.

So combining these factors gives the next table which moves through the income scale as above, but shows the cumulative tax saved (or otherwise) each time the rate of tax changes. The tax rates applying to 2020/21 have been used, and the company profits are used to pay a salary of £8,788 (the current employer NIC threshold) with the remaining profits distributed by way of dividend.

Although retaining profits in the company will produce a significant tax saving to the individual, this table illustrates a ‘worst case scenario’ in the case of the tax burden, as many other factors may affect the amount of profits drawn or retained.

2.2 Tax burden compared – self-employed vs limited company (excluding Scotland) 2020/21

The full table of marginal rates in 2020/21 is set out below. This compares the cumulative tax and Class 4 NIC borne by a sole trader with the burden on the same profit generated in a company and fully distributed as a salary of £8,788 (the employer NIC threshold) and the remainder by dividend. Class 2 NIC is introduced as a flat charge in the first slice of income. The marginal rates are compared in the table below, which is also available as a PDF download.

Tax burden comparison

A PDF of the table comparing the cumulative tax and Class 4 NIC borne by a sole trader vs a limited company.

Download
Income slice Cumulative income Sole trader Ltd company Cumulative saving
£ £ Rate % Tax on slice £ Cum tax £ Rate % Tax on slice £ Cum tax £ £
Er NIC thresh 8,788 8,788 0 159 159 0 0 0 159
Ee NIC thresh 712 9,500 0 0 159 19 135 135 24
PA 3,000 12,500 9 270 429 19 570 705 (276)
Div to £2,000 3,340 15,840 29 969 1,398 19 635 1,340 58
To HR thresh 34,160 50,000 29 9,906 11,304 25.07 8,564 9,904 1,400
Div to HR 9,667 59,667 42 4,060 15,364 25.07 2,423 12,327 3,037
To £100,000 40,333 100,000 42 16,940 32,304 45.32 18,279 30,606 1,698
To £100,000 from co 21,395 121,395 62 13,265 45,569 45.32 9.696 40,302 5,267
PA taper ends 3,605 125,000 62 2,235 47,804 58.49 2,109 42,411 5,393
PA taper to £8,788 in co 5,560 130,560 42 2,335 50,139 58.49 3,252 45,663 4,476
To AR thresh 19,440 150,000 42 8,165 58,304 63.57 12,358 58,022 282
PA taper ends in co 2,259 152,259 47 1,062 47,804 63.57 1,436 59,458 (92)
To AR in co 30,864 183,123 47 14,506 73,872 45.32 13,988 73,446 426
Equality 14,895 198,018 47 7,001 80,873 49.86 7,427 80,873 0
Thereafter     47     49.86      

* These rates reflect the fact that the salary is taxed at 20% when the personal allowance reduces below £8,788.

2.2.1 Analysis

The adviser could use this chart to compare worst case tax savings with their client’s profit levels to determine whether the additional costs of operating through a limited company are supported by any tax savings. Alternatively, a client who might be seeking the protection of limited liability could be advised of the impact of this on their tax position.

The impact of retained profits is simply arrived at by reducing the relevant profit burden by the amount of profits to be retained x the rate applying to dividends in that income band. Note that within the bands above, the tax is borne uniformly across each band so that comparable tax burdens (based on full distribution) can be calculated.

Example

At profits of £43,000, and assuming that all profits are drawn as explained above, the relative tax burdens are as follows.

On profits of £15,840 – sole trader £1,398, plus additional profits of £27,160 at 29% (£7,876) – total tax and NIC = £9,274.

On profits of £15,840 – limited company £1,340 plus additional profits of £27,160 at 25.07% (£6,809) – total tax = £8,149.

The bare bones tax saving is £1,125. This can then be compared to the anticipated additional administrative costs of running the business through a limited company.

2.2.2 Comparative Table (not Scotland)

A comparative table for various levels of profit (remembering that this is based on 100% profit extraction) may help.

Profit

Sole trader

Limited company

Tax saved

£10,000

£204

£230

(£ 26)

£20,000

£2,604

£2,383

£ 221

£30,000

£5,504

£4,890

£ 614

£40,000

£8,404

£7,397

£1,007

£50,000

£11,304

£9,904

£1,400

£60,000

£15,504

£12,480

£3,024

£70,000

£19,704

£17,013

£2,691

£80,000

£23,904

£21,545

£2,358

£90,000

£28,104

£26,078

£2,026

£100,000

£32,304

£30,610

£1,693

2.2.3 Comparative Table (Scottish taxpayers)

A comparative table for various levels of profit (remembering that this is based on 100% profit extraction) may help.

Profit

Sole trader

Limited company

Tax saved

£10,000

£204

£230

(£ 26)

£20,000

£2,583

£2,383

£ 200

£30,000

£5,532

£4,890

£ 642

£40,000

£8,532

£7,397

£1,135

£50,000

£12,846

£9,904

£2,582

£60,000

£17,146

£12,480

£4,666

£70,000

£21,446

£17,013

£4,433

£80,000

£25,746

£21,545

£4,201

£90,000

£30,046

£26,078

£3,968

£100,000

£34,346

£30,610

£3,736

The marked difference in income tax rates for Scottish taxpayers, and in particular the 50% effective rate between profits of £43,430 and £50,000 make operating through a limited company much more attractive for those clients. Obviously, this is a situation which may also affect Welsh taxpayers once the Welsh Assembly implements different income tax rates; this is likely to happen from April 2022, after the next election which is due in May 2021.

2.3 Additional administrative costs

The adviser will have no difficulty in identifying the additional administrative burden imposed on a small limited company as opposed to a sole trader with no staff. The costs attributable to these responsibilities will, of course depend on how much of the administration the client is willing or able to do for themselves, and the likely charges that the adviser would apply. These can be factored into the considerations above in assisting the client to decide what is the best course of action.

Looking to the future, although Making Tax Digital is due to be implemented for income tax before it is for corporation tax, it is unlikely that this will introduce more complexity than currently required under the corporation tax regime which requires iXBRL tags to be applied to accounts and computations.

2.4 Setting the director’s salary

As part of the advice offered in this context, you may consider advising a client director on a tax-efficient method of extracting funds from the company. The illustrations above all take the route of paying the director a modest salary so that no NIC is incurred, and the remaining profits are extracted by way of dividend.

Including a salary for the director will normally reduce the overall tax liability as this is deductible for corporation tax and therefore saves tax at 19% currently, but will usually fall within the personal allowance for the director, and thus produce no income tax liability.

Given the saving of 19%, you may view the objective as increasing the salary to a point where the corporation tax saving exceeds the additional tax and national insurance costs by the maximum amount.

However, this approach, while worthy of some analysis, is in practice complex to implement. Individual client directors may have a mix of other income, which may complicate the picture, as increasing the salary may bring that income into charge at 20%. Particularly challenging to consider is the receipt of income from letting residential property for which a tax reduction for interest may be available under s274A, Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). Suffice to say that the combined NIC cost (where both primary and secondary contributions are borne) is 23.18% (12% + (13.8% less 19% corporation tax relief), or 12% + (13.8% x 81%)), which exceeds the corporation tax saving of 19%, so increasing salary to a point where both elements of Class 1 NIC are due is not worthwhile.

Paying a salary at least equal to the lower earnings limit (£6,240 in 2020/21) will require a payroll scheme to be operated and returns made under RTI at least once a year, but in exchange, the director acquires a state pension entitlement for that year. Increasing the salary to the Class 1 secondary threshold (£8,788 in 2020/21) will be beneficial in tax terms if the individual has no other income other than that deriving from the company. No NIC is due at this point. Increasing the salary still further will incur Class 1 secondary NIC, unless the company can benefit from the employment allowance. The fact that this is not available to single director companies poses an issue here, although at a net rate of 11.18% overall tax savings are still on offer. Increasing still further until the Class 1 primary threshold (£9,500 in 2020/21) is reached is, for most directors the best solution, but the practical implications of an occasional payment of NIC may encourage some advisers to recommend a maximum of £8,788 per annum as the most cost-effective overall solution. The additional tax saving by increasing to £9,500 is only £55.69 per annum after taking the secondary contributions into account.

This analysis of the level of director’s salary is based on tax savings only. Directors should note how the UK Government COVID-19 support schemes have applied – in the event of furlough, the Coronavirus Job Retention Scheme (CJRS) may provide support for salary paid, but not for dividends.

2.5 Business motoring issues

One of the more challenging aspects of giving advice to clients about limited company status is the issue of business motoring costs. Where business motoring is a significant cost to the business, this may be the tipping point that determines that limited company status is not appropriate.

The rates of benefit in kind on even relatively fuel-efficient cars have increased so significantly over the last five years that it is unlikely that a business owner travelling significant distances for business would benefit from running their business through a limited company unless they move to wholly electric motoring.

The tax benefits of electric motoring are not exclusive to limited companies, so a consideration of the impact of a proposed move to electric motoring on both self-employed and limited company status should be undertaken in any event, as this is unlikely to distort the decision to incorporate.

2.5.1 Conventional cars – the trade off

The business motoring issue becomes a decision point where the requirements of the business include significant travel by car. If a business owner is required to drive, for example, 30,000 miles a year on business (with an insignificant amount of private travel – say 5%) then as a self-employed individual, 95% of the costs of running the car are deductible for both income tax and Class 4 NIC, with capital allowances given on 95% of the cost of the car. The mechanism for giving the capital allowances will normally delay the allowances until the vehicle is sold, but as the car will be in a single asset pool (by virtue of private use) then a balancing allowance will arise on sale, effectively providing tax relief on the full business element of the cost of the car.

In a limited company, there is the benefit of an additional deduction for the remaining 5% of the cost of the purchase and running cost of the car, but as the car will not be in a single asset pool, but rather in one or other of the ‘class’ pools (main pool or special rate pool) no balancing allowance is given on sale, and the time taken to recoup a material proportion of the original cost in tax relief is significant. For example, at 6% writing down allowance it takes 36 years to obtain 90% of the net cost of a car in tax relief.

Added to this of course is the benefit in kind cost of the car to the director. The existence of a benefit in kind charge will play into considerations about the appropriate salary to advise (as if it is no longer sheltered by the personal allowance it is taxable at 20% minimum) and the amount of tax due on the benefit is likely to be a significant figure. With the level of business motoring described above, it is unlikely that the most fuel-efficient (compact, low power) vehicles will be appropriate for the individual’s needs and safety. To minimise the benefit in kind, drivers would be advised to look for a hybrid car, or a diesel meeting the new emissions requirements to avoid the 4% supplement. Again, with the level of business motoring, it is unlikely that the rates allowed for business mileage claims of 45p for the first 10,000 miles a year, followed by 25p thereafter will fully cover the cost of motoring if the business owner decides to keep their car out of the company.

3 The future – potential changes and their impact on the dynamic

During COVID-19 the relative differences in tax and NIC treatment between the self-employed and small limited companies were commented upon by the Chancellor and it is clear that the Treasury may well look at changing part of this dynamic. Recent experience (since July 2015) has shown that the interplay between the rates of tax and NIC applying to the self-employed, and the rates of corporation tax and dividend taxation are viewed together when designing tax policy in this area.

For example, the most recent changes to the taxation of dividend income were specifically introduced to prevent the proposed reductions in corporation tax providing too much incentive for small businesses to incorporate.

It is, of course difficult to speculate as there is a wide range of measures that could be considered, but these fall into three main areas:

  • Increasing the rate of Class 4 NIC
  • Increasing the rate of corporation tax
  • Amending dividend taxation

The first of these would increase pressure to incorporate, so would potentially be combined with one of the other two to neutralise that impact.

3.1 Numerical examples : increase in NIC rate

Increasing the Class 4 NIC rate has been proposed before, in an attempt to align it more closely (if not fully) with the rate of primary Class 1 contributions, given the changes to pension entitlement for the self-employed introduced in the last five years (since April 2016). In Budget 2017, the then Chancellor Philip Hammond attempted this on the basis that the self-employed are now entitled to the same state pension rights as employees, but pay 3% less in NIC on the main earnings band; this results in a saving to the self-employed taxpayer of up to £1,215 (2020/21). The proposal was quickly withdrawn; counterarguments to rate alignment include the lower support for the self-employed in terms of other statutory payments and state benefits, the risks of self-employment such as slow payment, and the lack of enjoyment by the self-employed of tax-efficient employment benefits such as auto-enrolment.

Table: Class 4 contributions main rate 11%, tertiary rate unchanged

Profit

Sole trader

Limited company

Tax saved

£10,000

£214

£230

(£ 16)

£20,000

£2,814

£2,383

£ 431

£30,000

£5,914

£4,890

£1,024

£40,000

£9,014

£7,397

£1,617

£50,000

£12,114

£9,904

£2,210

£60,000

£16,314

£12,480

£3,834

£70,000

£20,514

£17,013

£3,501

£80,000

£24,714

£21,545

£3,169

£90,000

£28,914

£26,078

£2,836

£100,000

£33,114

£30,610

£2,504

The maximum increase in annual contributions for those earning £50,000 or more is £810.

Table: Class 4 contributions main rate 12%, tertiary rate unchanged

Profit

Sole trader

Limited company

Tax saved

£10,000

£219

£230

(£ 11)

£20,000

£2,919

£2,383

£ 536

£30,000

£6,119

£4,890

£1,229

£40,000

£9,319

£7,397

£1,922

£50,000

£12,519

£9,904

£2,615

£60,000

£16,719

£12,480

£4,239

£70,000

£20,919

£17,013

£3,906

£80,000

£25,119

£21,545

£3,574

£90,000

£29,319

£26,078

£3,241

£100,000

£33,519

£30,610

£2,909

The increase in Class 4 NIC for those with income over £50,000 is £1,215. This has quite a significant impact on the tax savings from incorporation, but this change is unlikely to be done in isolation.

3.2 Numerical examples – increase in corporation tax rate

If the rate of corporation tax were to increase, this could neutralise the impact of the NIC changes examined above. However, such a change would need to be seen in the context of the wider impact on tax borne by businesses. Restricting an increase to owner-managed businesses or close companies would add more complexity, but would better target the change. Again, I have calculated the impact of two levels of change in the rate of corporation tax. The following tables leave the Class 4 NIC rate unchanged, to consider the impact of the corporation tax change in isolation.

Table: Corporation tax increased to 21%

Profit

Sole trader

Limited company

Tax saved

£10,000

£204

£255

(£51)

£20,000

£2,604

£2,591

£13

£30,000

£5,504

£5,283

£ 221

£40,000

£8,404

£7,975

£ 428

£50,000

£11,304

£10,668

£ 636

£60,000

£15,504

£13,360

£2,144

£70,000

£19,704

£17,839

£1,864

£80,000

£23,904

£22,507

£1,397

£90,000

£28,104

£27,174

£929

£100,000

£32,304

£31,482

£ 462

The tax saving through incorporation at lower levels of profit is unlikely to justify operating through a limited company once the additional administrative costs are taken into account. The clear message for clients would then be that limited liability comes with an associated cost.

Table: Corporation tax increased to 23%

Profit

Sole trader

Limited company

Tax saved

£10,000

£204

£279

(£75)

£20,000

£2,604

£2,798

£(194)

£30,000

£5,504

£5,676

£ (172)

£40,000

£8,404

£8,553

£ (149)

£50,000

£11,304

£11,430

£(126)

£60,000

£15,504

£14,308

£1,196

£70,000

£19,704

£18,666

£1,038

£80,000

£23,904

£23,468

£435

£90,000

£28,104

£28,271

£(167)

£100,000

£32,304

£33,073

£ (770)

3.3 Numerical examples – changes in dividend tax

An alternative to increasing corporation tax would be to increase the income tax charge on dividends. This would balance the desire to incorporate brought about by an increase in Class 4 NIC without the effect being an issue for the wider economy. It is likely that a nil rate band of dividends would be retained, in order to simplify the tax system for ordinary taxpayers who hold a small amount of shares as investments. Reducing the band to £1,000 to parallel the personal savings allowance and tapering it in the same way (so £500 for a higher rate taxpayer and zero for an additional rate taxpayer) may be an acceptable outcome in practical terms, but for the purpose of these calculations, it is assumed that it remains £2,000.

The following table illustrates the impact of increasing the basic rate on dividends to 10%, but retaining the other rates as they are.

Table: Basic rate on dividends increased to 10%

Profit

Sole trader

Limited company

Tax saved

£10,000

£204

£230

(£ 26)

£20,000

£2,604

£2,468

£ 136

£30,000

£5,504

£5,178

£ 326

£40,000

£8,404

£7,888

£ 516

£50,000

£11,304

£10,598

£ 706

£60,000

£15,504

£13,368

£2,136

£70,000

£19,704

£17,900

£1,804

£80,000

£23,904

£22,433

£1,471

£90,000

£28,104

£26,965

£1,139

£100,000

£32,304

£31,498

£806

With a basic rate of 10% the effective marginal rate of tax on profits extracted as dividends into the basic rate band is 27.1% as opposed to 29% for the self- employed taxpayer. If Class 4 NIC were to increase, there would be an argument to increase this still further to bring the rates closer together.

Increasing the higher rates of tax on dividends has a significant effect on higher profits, but it is likely that the taxpayer would retain as much profit as possible in order to minimise exposure to much higher rates of tax.

The following table considers a 10% basic rate and 35% higher rate on dividends.

Table: Dividend tax 10% basic rate and 35% higher rate

Profit

Sole trader

Limited company

Tax saved

£10,000

£204

£230

(£ 26)

£20,000

£2,604

£2,468

£ 136

£30,000

£5,504

£5,178

£ 326

£40,000

£8,404

£7,888

£ 516

£50,000

£11,304

£10,598

£ 706

£60,000

£15,504

£13,375

£2,129

£70,000

£19,704

£18,110

£1,594

£80,000

£23,904

£22,845

£1,059

£90,000

£28,104

£27,580

£524

£100,000

£32,304

£32,315

£ (11)

3.4 Balancing the impact

As outlined above, it is likely that if the decision is made to increase Class 4 NIC then a corresponding change will be made to one (or both) of the taxes in the small company scenario to balance the effect of the change.

The following tables compare the potential changes and their likely impact on the considerations to advise incorporation.

Table: Class 4 NIC increased to 11% and dividend tax to 10%

Profit

Sole trader

Limited company

Tax saved

£10,000

£214

£230

(£ 16)

£20,000

£2,814

£2,468

£ 346

£30,000

£5,914

£5,178

£ 736

£40,000

£9,014

£7,888

£1,126

£50,000

£12,114

£10,598

£1,516

£60,000

£16,314

£13,368

£2,946

£70,000

£20,514

£17,900

£2,614

£80,000

£24,714

£22,433

£2,281

£90,000

£28,914

£26,965

£1,949

£100,000

£33,114

£31,498

£1,616

As there remains quite a substantial tax saving above the £50,000 profit level, a modest increase in corporation tax might also be factored in.

Table: Class 4 NIC increased to 11%, dividend tax to 10% and corporation tax to 20%

Profit

Sole trader

Limited company

Tax saved

£10,000

£214

£242

(£ 28)

£20,000

£2,814

£2,568

£ 246

£30,000

£5,914

£5,358

£ 546

£40,000

£9,014

£8,168

£ 846

£50,000

£12,114

£10,968

£1,146

£60,000

£16,314

£13,768

£2,546

£70,000

£20,514

£18,314

£2,200

£80,000

£24,714

£22,914

£1,800

£90,000

£28,914

£27,514

£1,400

£100,000

£33,114

£32,114

£1,000

4 Conclusion

It is very likely indeed that we shall see changes to the taxation of smaller businesses announced in 2021, whether implemented from 2021 or 2022. For reasons of tax neutrality, this may mean that a combination of changes impact these business clients, and we should be ready to provide timely and appropriate advice to clients. Some may be satisfied to accept that the price of limited liability is a slight increase in overall costs (taking tax and administrative costs into account), but some may be convinced that moving back to self-employed status is the best choice for them. The potential impact of Making Tax Digital (MTD) for Income Tax will also feature in this advice, as moving back to self-employed status would bring a much earlier start date for MTD than remaining as a limited company.

ICAEW Know-How from the Tax Faculty

This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.

Tax burden comparison

A PDF of the table comparing the cumulative tax and Class 4 NIC borne by a sole trader vs a limited company.

Download