Starting a business on your own is no easy thing to do. Finding the right idea is certainly the first important task, but it’s not the only one. Even after deciding which services or products you’re going to sell, there’s plenty more to clarify before you’ll be ready to work.
First, you need to develop your business model and put your business plan on paper. For this, you’ll need to gather a lot of information, do market research and market analysis, and carefully evaluate inherent risks in order to reduce them. Then comes the financial plan, which explains how and when you are going to start making profits and paying your potential investors. At My Business Plans, we help with that by providing business plan template Excel free so you can figure out where to start.
Finally, once you’ve worked out all these issues and answered all these questions, you’ll choose which structure and legal status works the best with your business model. It’s an important decision, especially regarding how you plan for your business’ future growth.
This article aims to introduce you to the sole trader, partnership and limited company. These are the three main structures you will have to choose between when starting-up in the UK. We’ll define the status, list pros and cons and introduce tax, National Insurance contributions, value added taxes, and other expenses you’ll need to take into account. We hope it will help you make an informed decision.
Sole trader
As a sole trader, you are self-employed. You run and own the entire business as an individual, which means that you are legally responsible and personally liable for your business finances! In other words, you can keep your business profits after taxes, but you will also be personally responsible for any losses that your business incurs.
| Advantages | Disadvantages |
| No dues or fees at registration | Full liability in case of debts |
| Not much financial restrictions. | 40% tax as soon as your profits exceeds £41,865 |
| Good privacy | Complicated if you need to borrow money |
| Few paperwork and reporting |
Tax
You will automatically be sent a self-assessment notice by the end of each tax year. A tax year starts on April 6th and ends on April 5th every year. You can fill in and submit this document online. It is encouraged by HMRC, and it is the safest and most secure way to do so. Plus, filling your declaration online gives you three extra months to complete it (a paper tax has to be returned by the 31st October, an online tax can be submitted until 31st January).
After you’ve done the tax payment for your first year (basically your first tax payment), you are going to start ‘payments on account’.
Payments on account are based on your due tax from the previous tax year, separated in two remittances : the first on January 31st, the second on July 31st. In other words, you can estimate your payments on account by dividing the amount you have to pay for the previous year by two.
Beware: for your first year of activity, your first payment on account is due on the same date as the tax from your self-assessment (January 31st) ! Be aware of this, and make sure you have enough money to pay the required amount before the deadline, otherwise you’ll be fined by HMRC.
| Income amount | Tax rate |
| <£11.500 | 0% |
| £11.500 > £45.000 | 20% |
| £45.001>£150.000 | 40% |
| >£150.000 | 45% |
Tax rates for year 2017/18 (Source)
National Insurance Contributions (NICs)
Class 2 NICs: £2.85/week
| Earnings | Class 4 NICs |
| £8.164>£45.000 | 9% of your earnings |
| >£45.000 | 2% of all profits |
Value Added Tax (VAT)
| Earnings | VAT registration |
| <£85.000 | not mandatory |
| >£85.000 | mandatory |
Private Limited Company
A private limited company is a business structure where the business is legally distinct from the person who runs it. If you register as such, you’ll be able to separate the company’s finances from your personal ones. You will also be able to own assets and keep any profits the business makes after taxes. A private limited company cannot offer shares to the general public, which is why it’s a popular set-up for small businesses.
| Advantages | Disadvantages |
| Personal finances exposure risks are reduced | Heavier administration |
| Less taxes | Obligation to make financial reports and annual accounts public |
| Possible to have corporate clients | More taxation |
| Better image to raise money |
Corporation Tax
Every year, all limited companies must pay the Corporation Tax on their profits. Once you start to trade, you have three months to register for Corporation Tax with HMRC. In order to pay the tax, you have to complete and submit your corporation tax return : CT600. If your business profits are less than £1.5M per year, your corporation tax bill has to be paid maximum nine months and one day after the end of the accounting period from your previous fiscal year. For businesses that make more than £1.5M in profits per year, payments are made in installments.
Allowances and reliefs are also available. For example, allowances include the deeducation of the costs of running your business from the company’s profits. For example training seminars, business assets (vehicles, computers, etc.) or accomodations.
As for reliefs, there are a few available depending on what your company’s activity or industry. For instance, if you work in the field of creative industries, you can claim a larger deduction thanks to the creative industry tax relief !
We will give more detailed information about Corporation tax, including deadlines, payment methods, allowances and reliefs soon in a dedicated post.
| Year | Rate |
| 2018-2019 | 19% |
| 2017-2018 | 19% |
| 2016-2017 | 20% |
Corporation tax rates by year from 2016 to 2019
Income tax and National Insurance Contributions (NICs)
If you or your employees receive a salary, you all will need to pay income tax on any income above £11.500 a year. Employees and limited company directors both pay Class 1 contributions.
The easiest way to do this is to incorporate a PAYE system in order to deduct both income tax and NICs at the source.
| Earnings (a week) | Class 1 NICs |
| £162>£892 | 12% |
| >£892 | 2% |
Class 1 National Insurance rate 2018/19 (Source)
Value Added Tax (VAT)
Your company has to register for Value Added Tax if it makes more than £85.000 a year in benefits. When registered, you will collect VAT for HMRC by adding the rate (20% for standard rate) to the bills you give your clients or customers.
Dividend tax
Since April 2018, you have to pay tax if you received more than £2.000 on dividends during last financial year. Previously, the limit was £5.000.
Partnership
A business partnership includes two or more people that share ownership and responsibilities, including the costs and risks inherent in the business. Note that there are different rules depending on if you choose a limited partnership or a limited liability partnership, and that the partner can be a person as well as a limited company!
| Advantages | Disadvantages |
| Easy set up, flexible and low cost structure | Full liability for debt |
| Shared responsibility | Often messy to wind up |
| Easier to raise money |
Tax
For partnerships, the tax system is the same as the sole trader’s, except you must declare how much each partner gained during the year. For more precise information, see the sole trader’s tax section!
| Income amount | Tax rate |
| <£11.500 | 0% |
| £11.500 > £45.000 | 20% |
| £45.001>£150.000 | 40% |
| >£150.000 | 45% |
Tax rates for year 2017/18 (Source)
National Insurance Contributions (NICs)
Class 2 NICs: £2.85/week
| Earnings | Class 4 NICs |
| £8.164>£45.000 | 9% of your earnings |
| >£45.000 | 2% of all profits |
Value Added Tax (VAT)
| Earnings | VAT registration |
| <£85.000 | not mandatory |
| >£85.000 | mandatory |
As you can see, there are many factors to take into account, and the decision mostly depends on your vision of your business’ future. That’s why you should look at the different structures with only the clearest view of your company’s goals and objectives.
To establish these objectives, don’t hesitate to download our free and easy-to-use Excel financial plan frame: business plan Excel.
We’ll also be publishing new articles on how to set up and manage your business as a sole trader, a partnership, or a limited company in the UK, so stay tuned! You can also visit UK government help pages for more information on this subject.