In the UK, there are two types of organisations; unincorporated and incorporated.
The most well known type of unincorporated organisations are sole trader and partnership businesses whereby the only registration will be with HMRC for tax reporting purposes.
Incorporated organisations are registered organisations and the most common incorporated organisation is a limited company. Limited Companies are registered with Companies House but they are also registered with HMRC for tax reporting purposes.
Limited companies are attractive to one or more individuals setting up a business because of offering limited liability. Limited liability means that should the company enter a situation in which it is unable to pay its debts, you as a shareholder (an owner in the organisation) will only lose the value of your ‘share’ in the business. This is the amount you paid to purchase shares in the company. However, limited liability can be reversed if for example, the bank requests a personal guarantee when opening the company bank account.
The other key advantage to setting up a limited company is tax efficiency. By way of example, if you are a sole trader and your net profits have increased significantly and your taxable profits are within the higher tax band (2022-23, £37,701 – £150,000), you will find that after absorbing your personal allowance (2022-23, £12,570), a proportion of your taxable profits will be taxed at 20% and the remaining proportion will be taxed at the higher rate of 40%. BUT you will also pay Class 2 and Class 4 National Insurance Contributions. Class 2 National Insurance Contributions are £3.15 per week if your taxable profits are more than £6,725 (2022-23) and Class 4 National Insurance Contributions are calculated at the rate of 10.25% on taxable profits between £11,908 and £50,270 and 3.25% on profits above £50,270 (2022-23).
In contrast, as a limited company, Class 2 and Class 4 National Insurance Contributions do not apply. However, Corporation Tax is payable (currently 19% of taxable profits).
A limited company can be an employer and a director / shareholder can be an employee of that company and receive wages. As a director / shareholder, you can also receive dividend income from the company. Dividends are distributions of profit after tax from a company. The rates of dividend tax are lower than income tax rates: (2022-23) 7.5% within the basic tax band (20% for income tax), 32.5% within the higher rate tax band (40% for income tax). You can also receive a tax free dividend allowance of £2,000 above your personal allowance (£12,570 in 2022-23).
Limited companies will have to meet its obligations with Companies House AND HMRC for example, submitting published accounts, submitting a corporation tax return, filing an annual confirmation statement and as a director / shareholder receiving dividend income, a personal tax return will also need to be filed. There are legal obligations you will have as a director running a limited company so you need to understand your personal duties.
Whether you are moving to a limited company structure or you are considering starting your business as a limited company structure, ensure you have all the necessary information to make the right decision for your business.
We can incorporate a company as well as keep you compliant and if you need a registered office address, we can provide this too!