You have decided to take the big leap of faith and start your own business, the next question is how this should be structured. Should you trade in your personal name or through a limited company?
Trading in your personal name
If you were to trade in your personal name, then you will have to register for self-assessment and complete personal tax returns. You will have to prepare accounts for your trading business with the details being shown on your personal tax return. The accounts are not published on any website and you can choose what year end you would like to have.
You will be subject to income tax and national insurance on the taxable trading profits. Tax on self-employed profits ranges from 20% to 45% depending on the amount of profit generated. Both Class 2 and Class 4 national insurance contributions will be due as follows:
- Trading profits of more than £6,725 then Class 2 national insurance contributions of £3.45 per week.
- Class 4 national insurance contributions of 9% on trading profits between £12,570 and £50,270.
- Class 4 national insurance contributions of 2% on trading profits over £50,270.
The income tax and national insurance contributions liability needs to be paid to HM Revenue & Customs by the 31 January following the tax year end. For example, the income tax liability for the year ended 5 April 2023 will need to be paid by 31 January 2024, otherwise interest and penalty charges may apply. It is also likely that you will have to make payments on account towards the next year’s income tax liability. There are two payments on account which are due on 31 January and 31 July. The payments are based upon the earlier year’s income tax liability.
If you make a trading loss, then there are several options available to you as follows:
- If the loss occurs during the first four years of trading this can be carried back to an earlier year, usually resulting in a tax refund.
- If you have other income the loss can be used to reduce your taxable income in that year.
- Alternatively, the loss can be carried forward and set off against future trading profits. This will reduce the amount of tax that you pay in the future.
Trading through a limited company
The limited company is a separate legal entity to yourself. The company will need to be registered with Companies House. The company’s accounts will need to be submitted and are available to the public to view. Companies pay corporation tax on the total of its profits (which includes both trading profits and any chargeable gains). Current rates of corporation tax are:
- Where profits are less £50,000, a flat rate of 19% applies
- Where profits are more than £250,000, a flat rate of 25% applies
- For profits between £50,000 and £250,000 a form of ‘Marginal Relief’ can be claimed that produces an effective rate of between 19% and 25%.
The tax liability needs to be paid within nine months and a day from the year end. For example, if the company’s year-end is 31 March 2023, the corporation tax liability needs to be paid by 1 January 2024. If the company makes a trading loss, it can either be carried back to an earlier tax year or carried forward and used to reduce future profits.
It is important to remember that when you personally extract money from the company this will give rise to an income tax charge on yourself, the tax consequences depending on how those funds are extracted i.e. salary, dividend, loan etc…
If you would like any advice please contact our Director of Tax, Aaron Phillips.
Written April 2019 (Updated June 2023)