How to set up a limited company: tax benefits, costs and more

If you are self-employed or make money from buy-to-let property you could benefit from setting yourself up as a limited company. Here’s what you need to know.

What are the benefits of becoming a limited company?

The primary benefit of going from sole trader to limited company is that you are no longer personally liable for losses the business incurs.

A limited company is a separate legal entity to you personally and as such it is responsible for its own actions and losses.

As a sole trader if you run up losses you are personally liable for them and could go bankrupt.

As a limited company – provided you run your company legally and sensibly – your financial risk is only the money you invest in the company.

You could also find your tax bill falls if you become a limited company.

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What are the drawbacks?

There is more paperwork and regulations imposed on limited companies than on sole traders.

You must file accounts with Companies House every year by a specific date and, unless your company is exempt, you will also need to have your accounts audited annually.

Go from sole trader to limited company and you also stop being self-employed in the eyes of the taxman.

Instead you become an employee of your company and as such pay income tax and Class 1 National Insurance contributions on your salary.

However, company profits are subject to lower tax rates.

Before you set up a limited company, read this guide on the potential pitfalls.

How do I do it?

You need to register online at Companies House.

You can either purchase a ready-made company name online or you need to send a memorandum of association, articles of association and some additional forms to Companies House in order to create a new limited company.

A memorandum of association provides information on your company’s name, address and the nature of your business.

The articles of association outline the rules for how you will run your business.

If all this sounds complicated you can pay an accountant or solicitor to set up your company for you.

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What are the costs?

If you do everything yourself and keep it very simple you can set up a limited company for as little as £20, pay a professional to do it for you and the cost could rise to a few hundred pounds.

What are the tax implications?

As a sole trader you paid income tax on whatever you earned.

As a limited company profits are subject to corporation tax, which may be lower than your income tax rate. At present corporation tax is 19%.

If you pay yourself dividends these are subject to income tax, but you get a £5,000 annual allowance that is tax-free.

Also, when you die a limited company can be passed on to your beneficiaries and may benefit from Business Property Relief if inheritance tax is due.