Sole Trader vs. Limited Company: A Freelancer’s Guide (2024)

Which is the best legal entity for a brand new freelancer business?

It’s a question we are often asked,  sole trader vs limited company, which is better? And as per, the answer is often ‘it depends’

And, with the UK freelance scene booming, and likely to continue in this vein, it’s important to stay abreast of the pros and cons to the different strategies, and see if your original choice is still the best for you!

For the purposes of this article, we are going to assume that you know you will NOT be caught inside IR35 as you trade your freelancer business – please ensure you understand this topic in advance of signing any contract, and do take specialist advice if you are unsure!

Sole Trade vs Limited Company, Which route is best?

Such a crucial decision: do you set up as a sole trader or a limited company?

Each option offers distinct advantages and disadvantages, and the landscape is shifting in 2024 with some key tax and administrative changes.

So, how do you choose the right one for your freelance journey?

Here is a quick overview of some of the pros and cons to each of the paths…

Sole Trader: Simple Setup, Direct Rewards

  • Pros:
    • Easy and quick to set up: No registration with Companies House, just inform HMRC.
    • Simple tax filing: One Self Assessment form for your personal and business income.
    • Keep all profits: No corporation tax, you pay income tax on your profits.
    • Flexible structure: You’re the sole owner, making decisions and adapting quickly.
  • Cons:
    • Unlimited liability: You’re personally responsible for business debts and losses.
    • Can be less tax efficient: Once your business reaches a certain level of income and profit, sole traders have less flexibility in how they remunerate themselves and what tax they will pay.
    • Limited access to certain benefits: Like trivial benefits, or tax deductible pension contributions
    • Less professional image: Clients may perceive sole traders as less established.

Limited Company: Structure and Security, but Added Complexity

  • Pros:
    • Limited liability: Your personal assets are protected from business debts, so long as you always act in line with Companies Law and your fiduciary duties as a Director.
    • Professional image: Enhances credibility and can help you attract larger clients.
    • Tax flexibility: You can potentially pay corporation tax on profits at a lower rate than income tax, and remunerate yourself in a more tax effective way to suit your personal needs.
    • Employee benefits: There are certain benefits you can claim via your company as tax deductible expenditure, such as trivial benefits, employer pension contributions, relevant life cover and even private medical insurance or a company car, although for the latter two you must be aware of the benefit in kind impact
  • Cons:
    • More complex setup: Requires registering with Companies House and filing annual accounts, and corporation tax returns, EVEN IF the company does not trade in a period.
    • Increased administrative burden: Separate business and personal finances can equal more paperwork. Also, the timing of company accounts are not always the same as the personal financial year, meaning payment deadlines can be difficult to keep track of.
    • Higher costs: Registration fees, accounting fees, and potential tax liabilities, especially for smaller businesses who can’t take advantage of tax planning opportunities.

2024’s New Landscape (so far!!):

  • National Insurance changes: Lower Class 2 contributions for sole traders might make them more tax-efficient in certain income brackets.
  • Dividend tax allowance reduction: Consider dividend extraction strategies for limited companies to manage tax liabilities.
  • Reduction of Additional Rate Tax Threshold: High profit sole traders can be hit with large tax bills on top of the loss of personal allowance, which is not possible to plan for.

So, sole trader vs limited company, which route is right for you?

It depends on your specific circumstances and future aspirations. Here are some guiding questions:

  • Income: What’s your projected annual income? Sole traders might benefit up to around £50,000 (in profit), while limited companies can be more tax-efficient above that.
  • Growth: Do you plan to expand quickly? Limited companies offer more flexibility for raising capital and attracting investors.
  • Risk tolerance: Are you comfortable with unlimited liability? If not, a limited company provides valuable protection.
  • Professional image: How important is client perception? A limited company can convey a more established image.
  • Ideal client: Your clients (or if you’re a franchisee, your franchisor) might insist on you setting up as a limited company, particularly if they are in the larger corporate or public sector

Remember, the decision is not permanent.

You can switch between sole trader and limited company status later, depending on your evolving needs.  BUT, you do need to be aware of your obligations, and the tax implications of a change in strategy, as we have seen major problems for business owners who didn’t keep track of filing requirements when stopping or pausing their trade through their limited company.

Seek professional advice:

Navigating the intricacies of business structure can be complex, and so much will depend on your personal situation right now as well as your plans for the future, so please feel free to contact the IN-Accountancy Team, who will be happy to guide you – there’s no such thing as a silly question in our world!!

Please note that the current video is slightly out of date with regards to the specific figures, but will be updated post 2024 Spring Budget for 2024-25 figures.

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