If you’re currently self-employed and earning in the 40% tax bracket (£50,271–£100,000), you may be considering whether switching to a limited company is the right move—especially if your income is expected to exceed £100,000. Choosing between remaining self-employed or incorporating your business can have significant tax and financial implications.
In this blog, we’ll explore the pros and cons of each option with illustrative examples based on the two key tax brackets and discuss long-term financial strategies that could make incorporation more beneficial.
Pros and Cons of Self-Employment vs. Limited Company
Self-Employed (Sole Trader)
Pros:
- Simpler and less costly to set up and run.
- Fewer administrative responsibilities.
- Greater privacy as accounts are not made public.
- Losses can be offset against other income.
Cons:
- Higher personal tax rates, with 40% tax on income over £50,271.
- Personal liability for all business debts.
- Limited tax planning opportunities.
- Less professional perception compared to a limited company.
Limited Company
Pros:
- Corporation tax rate of 25% (as of 2023), which is lower than the higher personal tax rate.
- Liability is limited to the company, protecting personal assets.
- Greater tax planning options (e.g., salary vs. dividends, pension contributions, and spouse income splitting).
- Potential for increased business credibility.
Cons:
- More complex administrative and compliance requirements (e.g., annual filings with Companies House).
- Additional costs for accountancy services.
- Dividends subject to additional tax.
- Public disclosure of financial information.
Income and Tax Implications: Summarised Overview
While the tax savings of incorporating may not be substantial at certain income levels, the decision ultimately depends on whether the non-financial factors—such as limited liability, professional credibility, and long-term growth opportunities—are important to you.
Summary of Tax Differences
- Self-Employed at £75,000 Income: Approximate tax payable £15,175, take-home pay £59,825.
- Limited Company at £75,000 Income: Approximate total tax payable £22,162, take-home pay £52,838.
- Self-Employed at £120,000 Income: Approximate tax payable £40,575, take-home pay £79,425.
- Limited Company at £120,000 Income: Approximate total tax payable £42,656, take-home pay £77,344.
Considerations for Property Developers
Tax considerations can be more complex for property developers, and understanding the right structure is essential for tax efficiency and compliance. If you’re involved in property development, it’s crucial to understand whether you are a property investor (holding rental properties) or a property trader (buying, refurbishing, and selling properties). If you’re involved in property development, your tax considerations may be more complex. Understanding whether you are a property investor (holding rental properties) or a property trader (buying, refurbishing, and selling properties) is crucial.
- Investors – Rental income is taxed as investment income, meaning Capital Gains Tax (CGT) applies when selling properties.
- Traders – Buying, developing, and selling properties is classed as business income, subject to either Income Tax (if self-employed) or Corporation Tax (if operating through a company).
Property Tax and VAT Considerations
- VAT on Property Development:
- Buying and selling standard residential properties? ❌ No VAT applies, and VAT on renovations cannot be reclaimed.
- Converting commercial properties to residential? ✅ A reduced 5% VAT rate may apply.
- Building new residential properties? ✅ Sales are zero-rated for VAT, meaning VAT on costs can be reclaimed.
- CIS (Construction Industry Scheme) Compliance:
- If you hire subcontractors for development projects, you may need to register for CIS, deduct CIS tax, and submit monthly returns.
Key Takeaway
If you are involved in property development, structuring your business correctly can help you reduce tax liabilities and increase profit retention. Seeking expert advice ensures compliance with VAT, Capital Gains Tax, and CIS regulations.
Long-Term Financial Strategies
Beyond the immediate tax savings, incorporating offers several long-term financial benefits:
- Tax-Efficient Pension Contributions: Directors can make employer pension contributions, which reduce taxable profits and provide long-term savings.
- Income Splitting Opportunities: You can allocate dividends to family members (if they are shareholders), reducing the overall tax burden.
- Retained Profits: Unlike sole traders who pay tax on all profits, a limited company can retain profits within the business for future reinvestment.
- Succession Planning: A company structure makes it easier to transfer ownership or bring in new investors.
Additional Considerations
- VAT: VAT registration may be necessary for both structures depending on turnover; learn more on the HMRC VAT guide.
- Legal Responsibilities: Running a limited company requires compliance with Companies House and additional filings. Find details on setting up a company.
Which Option is Right for You?
The decision between staying self-employed or becoming a limited company depends on your income, growth ambitions, and comfort level with compliance responsibilities. As your income approaches or exceeds £100,000, incorporation may offer tax efficiencies, but it also comes with additional responsibilities.
Disclaimer:
The examples provided in this blog are for illustrative purposes only. Tax calculations can vary based on individual circumstances. It is essential to seek professional advice tailored to your situation.
How Neon Accounting Can Help
At Neon Accounting, we specialise in helping SMEs in Leamington Spa and surrounding areas navigate their tax planning and business structuring options. Whether you’re looking to incorporate, optimise tax efficiency in property development, or need advice on VAT and CIS compliance, we’re here to help.
For personalised advice, contact us today or follow us on LinkedIn, Facebook, or Instagram for more tax-saving tips.
