Yes, you can change from a sole trader to a limited company. This involves setting up a company with Companies House, notifying HMRC, and transferring any business assets. This transition can provide liability protection and tax benefits, although it does bring new reporting and administrative requirements.
Many sole traders decide to transfer their business to a limited company structure for the benefits of liability protection, tax efficiency, and enhanced credibility. However, moving from sole trader status to a limited company involves specific steps, especially in transferring business assets and notifying HMRC (Her Majesty’s Revenue and Customs). Here’s what you need to know about changing from sole trader to limited company and the tax considerations involved.
Changing from self-employed to limited company status affects both income tax and national insurance contributions. In a limited company, the director can take a combination of salary and dividends, often resulting in a more tax-efficient structure. Additionally, profits are subject to corporation tax rather than income tax, which may be advantageous depending on your business’s profitability.
By forming a limited company, you can separate your business liability from your personal liability. Therefore, if anything goes wrong with your business’ finance, it will not affect you personally.
For example, if your business cannot pay a debt, it will not affect your house or other assets.
A limited company is a separate entity (person). Therefore, you can separate yourself from the business by forming a limited company.
Overall, your take-home pay will be higher if you form a limited company. If you are a higher rate taxpayer, with a tax rate of 40% or higher, then a limited company is the best option for you.
As a sole trader, you are required to record your transactions yourself and manage your books more accurately and regularly. However, a limited company will be more transparent and thus making your accounts easier to manager, something which is more acceptable by your customers/clients.
To utilise your personal allowance, we will run a director’s payroll on a regular basis for your business. A director payroll will help you to save around £2,400 yearly on your tax bill.
As a limited company is a separate entity, you can delay your business’ VAT registration until you reach the VAT threshold which is £85,000.
When we prepare and submit your director’s self-assessment tax return, we can claim dividend allowance. Overall, you can claim tax-free dividend allowance of up to £2,000.
Flat rate VAT means that you pay a lower VAT rate than the usual rate of 20%. You can apply for a flat rate VAT and save money on your VAT bill.
Once you form a limited company, you must ensure you comply with both Company and HMRC regulations. There are multiple deadlines you are required to meet, and failure to meet these deadlines will result in multiple penalties and/or fines.
As per a legal requirement by the Companies Act, you are required to prepare a statutory set of accounts according to the Financial Reporting Standard. We recommend hiring an accountant to prepare and file your company accounts and corporation tax to meet the requirements.
If your company sales amount to lower than £25,000, it is not ideal for you to form a limited company as the cost of maintaining a limited company will be higher than overall benefits.
If the owner of a business transfers the business into a limited company, there will be a change in the legal ownership of the business and the seller is deemed to have stopped trading.
Any trading loss that the seller has before the date of transfer for the business cannot be carried forward and set against the limited company’s trading profits.
On the other hand, there is a relief available that the sole trader can use if their business is transferred to a limited company. This is provided that they meet the following conditions:
The seller may set unrelieved trading losses against their first available income from the company in the most tax efficient manner.
If the seller receives dividends from the company, they can set off the unrelieved trading loss against the first dividend they received.
Elliott transferred his manufacturing business into Elliott Ltd. for 10,000 shares in the company which he plans to hold.
When he transferred his business to a limited company, he found that there were unrelieved trading losses of £20,000.
Elliott received dividends of £8,000 from the company.
Ultimately, Elliott can relieve the trading loss he meets the following conditions:
The dividends received by Elliott are £8,000. The c/f loss is £8,000 and the loss is to be carried forward by £12,000 (£20,000-£8,000).
Contact TaxCare today to get advice on how to transfer your business into a limited company.
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