• Xtract Accounting

Self-employed V's Limited Company - Which one should you choose?

Updated: Sep 22


Xtract Accounting, the small business Accountants for Directors and Limited Companies, offer their insight into the key differences between the two, and how to make this often-difficult decision.


'Ask an Expert'

You may have a lot of questions to ask before you start your new business venture; that is only natural. One of the first questions you might ask is whether you should be self-employed or trade through a Limited Company? - but how do you make that decision?


You might think that a good starting place would be to ask around; see what friends, family or colleagues do. Maybe even ask on a social media forum?


The problem with that is that the correct decision is in fact personal to you. So, what could be right for one person, could be completely wrong for another.


Let’s start at the beginning.


SELF-employment V's LIMITED company

It’s all about legal status and liability…


When you are self-employed, you are the business and the business is you. The monies you owe through the business are legally your responsibility - this is called unlimited liability. The assets of the business are legally yours, and you are legally responsible for paying taxes on your business profits.


However, a Limited company is an entirely separate legal entity to you; you just operate your business through it and have limited liability to its debts and losses. The company owns its assets and pays taxes on its profits. You only pay taxes on monies withdrawn from the company.


It is important to remember these key differences, as we refer to them at several points below.

Is your business a high risk business?

Referring to the legal status point above, if your self-employment business racks up big debts, you are legally responsible for paying them off. If you don’t, your personal assets could be at risk - including your house!


With a Limited company, your personal risk is usually limited - the debts therefore remain the legal responsibility of the Limited company, meaning your house is probably safe should things go pear shaped.


When do you want to start trading?

A self-employed individual can commence trading immediately, but you must inform HMRC of this by 5th October following the end of the tax year you started trading in. So, if you began trading between 6 April 19 and 5 April 20, you have until 5 October 20 to let HMRC know.


A Limited Company must first be incorporated (set up) with Companies House before you can begin trading. This is because you cannot trade through something that does not exist.


Will you also be in employment whilst running your business?

Not everything comes down to tax, but it must be a factor in here somewhere, so here we go.


Self-employed individuals are taxed based upon their business profits and not the money they withdraw from the business. So, you could withdraw no money at all, yet still have a tax liability to pay.


Your self-employment profits are also taxed through the same tax bands as your employment income. If your employment income fully utilises these tax bands, you could find yourself paying tax on 100% of your business profits.


Trade through a Limited company however, and the profits are taxed separately through the Corporation Tax regime. You would therefore only pay tax on the money you take out from the company, if any.


Do you think your business will stay small or grow quickly?

Looking at things from a tax point of view again, it is also worth considering whether your business is likely to stay small or whether you expect growth to be rapid.


Being self-employed provides next to no flexibility on paying tax on profits; if you have rapid growth, you could find yourself paying taxes at a higher rate very quickly, and you won’t get a choice in the matter.


Whilst it should not be the key motivator, trading through a Limited company offers the possibility of tax savings once you pass the higher rate tax threshold. This is because Corporation Tax is set at 19% and is not affected by tax bands like your personal tax.


In contrast, if you are expecting your business to remain fairly small, it could be more beneficial to be self-employed to make full use of your tax-free personal allowance. Limited companies do not have a tax-free allowance and will therefore start to pay tax as soon as £1 of profit is made.


Could you treat yourself like an employee?

Another key difference to understand… the funds in a Limited company bank account will not belong to you; even though it is your business and you are the one who earned it.


This means you cannot dip into the funds to pay for your personal expenses such as petrol or weekly food shops, or even your personal tax bills.


All withdrawals from the limited company must be paid to you as either employment income or as Dividends (i.e. a distribution from profits)


If you are self-employed, then the money is all yours!


Do you dislike deadlines and paperwork?

If you are self-employed, you will need to submit a self-assessment tax return to HMRC by the 31st January following the end of the tax year in question.


Personal taxes due for the tax year in question must also be paid to HMRC by the 31st January each year. However, you may in certain circumstances be required to make two additional payments of tax that count towards your next years tax liability, one by 31st January and the other by 31st July each year.


With a Limited Company, the above still applies but in addition to that, you will have to file annual accounts and a business tax return to HMRC, and a shortened set of accounts to Companies House, usually within 9 months of the end of your accounting period. Any Corporation Tax liability will need to be paid at this time also.


Furthermore, an annual confirmation statement (i.e. a statement of company details) must be submitted to Companies House around the anniversary of the company formation date and costs £13 to submit.


To enable you to take a salary from your Limited company, you may also need to register as an employer with HMRC and submit monthly information to them.

Then there is the record keeping aspects; It goes without saying that your record keeping should be kept neat, tidy, and up to date regardless of which set-up you choose. However, where Limited company record keeping is concerned, more effort is required due to the additional and more detailed accounts that you need to keep.


You will need to make sure that all invoices and purchases are made out to/from the Limited Company, and that the bank account and all loans and finance agreements are also in its name and not yours. Sales invoices, websites and stationery need to have more information on them too.


The point we are trying to make is that if deadlines and paperwork stress you out, you may want to keep it simple and choose to be self-employed.


Anything else that you may want to consider?

Of course, you may want to trade through a Limited Company simply because you want to.


Trading through a Limited companies can give the impression of being more trustworthy and established.


You may also work with clients who insist that they only work with Limited Companies, for insurance and contract purposes.


You might want to have a specific business name and brand, which can only be guaranteed when trading through a Limited company.


You may already have a self-employment business, in which case the turnover of the new one will be added to your current one for VAT purposes. So, if you believe that the two will have combined sales of over £85,000 then you may want to have one as a Limited Company to avoid becoming VAT registered.


You may start off as self-employed but a year later decide to incorporate.


There is not necessarily a right or a wrong answer; As with everything, there are pros and cons of both being self-employed and trading through a Limited company and what these are will vary from person to person.


Here at Xtract Accounting, we can talk you through the above questions, and provide you with our best unbiased advice. Then, if you decide to proceed with trading through a limited company, we can provide you with our Company Formation service – we’ll complete all the leg work for you, so the only thing you’ll need to worry about is choosing a name for your new Limited company.


Get in touch with us today by calling us on 03301332615 or email us at hello@xtractaccounting.co.uk.



About the Author of this Blog post…

Hi, my name is Gordon Roe and I am the Founder and Managing Director of Xtract Accounting. Having worked in an accountancy practice setting for well over a decade, I had become accustomed to the same annual routine for clients - Books in… Analyse… Queries out… Answers in… Finalise… Accounts and Tax Advice out.


Then, in 2020 I realised I could use advancements in technology and software to significantly improve the relationship between accountant and client, and at the same time, provide an insightful and real-time tax advice service. After all, that is what the modern client expects and deserves!


And so, Xtract Accounting was born…


Xtract Accounting are online accountants based in Lincolnshire, who offer proactive small business accountancy services exclusively to Directors and Owner Managed, Micro and SME Limited Companies throughout the UK.


We specialise in helping Directors Xtract more out for the work they put in!


Our fixed fee, all-inclusive monthly Accounting and Tax Advice service has been designed with busy Directors in mind, and offers a plethora of benefits including:

  • Inclusive accounting software provided by FreeAgent,

  • Inclusive Registered Office Address,

  • Your very own dedicated accountant,

  • Regular insights into how to maximise your tax efficient (or even tax free!) income,

  • Jargon-free telephone and email support,

  • Plus, much, much more!

With Xtract Accounting, you can be sure your accounts and tax will be kept up-to-date and organised.


Find out more about us or connect with us on Social Media (below)

Xtract Accounting is a modern, online Accountancy firm offering small business accounting services exclusively to Owner Managed Limited Companies based throughout the UK. Our fixed fee all-inclusive monthly Accounting and Tax Advice service provides advice in Real-Time to help Director's Xtract more funds out of their companies more tax efficiently. And with simple to use Cloud Accounting software included at no extra cost, it has never been easier to unlock your income potential and streamline your administrative tasks.

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Xtract Accounting is the trading name of Xtract Accounting Limited, registered in England and Wales under company number 12467541.

Registered Office: The Terrace, Grantham Street, Lincoln, Lincolnshire, LN2 1BD. 

Gordon Roe, Founder and Managing Director of Xtract Accounting Limited, is licensed and regulated by AAT under licence number 1004358. AAT is recognised by HM Treasury to supervise compliance with the Money Laundering Regulations and Xtract Accounting Limited is supervised by AAT in this respect.

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