The tax benefits of operating as a limited company

If you currently operate your business as a sole trader you may be considering making the switch over to being a limited company. This can come with a range of benefits, but some of the most attractive are those related to tax. For some, operating as a limited company can be highly tax-efficient and provide you with more income.

Here we take a look at some of the tax benefits of being a limited company to see if they would be beneficial to you.

Is it the right choice for you?

Operating your business as a limited company is not the right choice for everyone. It may be the case that staying as a sole trader would actually work out as tax efficient for you. It is worth discussing this with accounts experienced in working with both sole traders and limited companies in order to get a balanced opinion.

It should be mentioned that from a tax and financial perspective, operating as a limited company is generally somewhat more complex than operating as a sole trader. Thankfully there are many tools available online that can make the whole process of operating as a limited company far easier than it has ever been.

Your finances are entirely separated

The first major benefit of operating as a limited company is the fact that your finances are kept completely separate from the company. As a sole trader you will have had your personal finances and business finances intertwined – even those who keep their business and personal money in separate accounts, are still functionally a single entity for tax purposes.

As a limited company, you are an entirely separate entity. You are no longer tied to the finances of the company, and you can run accounts that have nothing to do with you as an individual. Not only does this limited your liability to the business, it also makes it her easier for you to manage your personal finances.

Income can be taken as a dividend

There is another important benefit of operating as a limited company which should not be overlooked, and this is found in the way that you are permitted to draw your income from the business. Many people who set up their limited company choose to appoint themselves as director and pay themselves a small salary.

However, they actually take the bulk of their income in the form of dividends. This makes paying yourself far simpler, and you can continue to have the benefits of additional cash in your personal account before you pay your tax bill at the end of the year.

Greater level of control

Unlike a sole trader, operating as a limited company means that you will have a great deal more control over how you are able to manage your finances. This means that you can make decisions on things such as how much you pay yourself, and when you wish to declare your dividends.

It could also give the option of employing your spouse, partner, or another family member in the business which could be beneficial from a tax perspective. It is always important to discuss this concept with an accountant around these sorts of tax decisions. This is especially true of the structure of shareholders.

Pension possibilities

As a sole trader, you would need to fund your pension through taxed income, but as a limited company, you will have a broader range of possibilities. This includes the potential to make pension contributions. It is typically the case that a company can make a pension contribution with higher tax relief than an individual can. 

Once again, it is important to take the advice of a professional before committing to any kind of pension plan, as there are many options available to you, and it is vital you make the right decision for your business and your individual finances.