With the UK economy facing several challenges, entrepreneurs and small business owners are looking for ways to maximize profits and reduce expenses. One strategy that can dramatically cut tax bills is to operate through a limited company rather than as a sole trader. By incorporating your business, you can take advantage of lower corporate tax rates and other tax relief available to limited companies. Our tax advisors explain the key benefits of running your business through a limited company and provide actionable steps to set one up correctly to minimize your tax liability.

How Operating Through a Company Cuts Your Tax Bill

The most significant tax advantage of a limited company is the lower corporate tax rate. In 2023, the corporate tax rate is just 19% compared to income tax rates of up to 45% for high earners. This difference alone can reduce your annual tax payment drastically.

In addition, limited companies allow you to claim more expenses to reduce your taxable income. As a director, you can claim deductions for costs related to running the business, such as office supplies, travel, phone bills, and other overheads. These types of expenses are not allowable when operating as a sole trader.

Company directors also have more flexibility in how and when they extract profits through salary and dividends. By optimizing your combination of salary and dividends, you can minimize your total Income Tax and National Insurance Contributions.

Setting Up a Limited Company for Maximum Tax Savings

To enjoy the full tax benefits of a limited company, you need to set it up and operate it properly. Here are some key steps:

• Choose a unique company name and register with Companies House. This officially creates your limited company.
• Open a business bank account. This keeps your business finances separate from your accounts.
• Register for corporation tax and PAYE with HMRC. This enables you to correctly account for and pay corporation tax and PAYE/NICs.
• Issue shares and appoint directors. As a one-person business, you will be the sole shareholder and director. Issuing shares creates share capital, an important distinction from your personal funds.
• Keep meticulous records. Maintaining detailed accounts of income, expenses, assets, and liabilities is vital for calculating your corporation tax liability accurately.
• Extract income via salary and dividends carefully. Work with your accountant to determine the optimal split based on tax rates and allowances each year.
• File your annual accounts and Company Tax returns. Your accountant can handle these filings for you.

Take Action Today to Slash Your Tax Bill

Operating through a limited company can unlock huge tax savings compared to being a sole trader. But you need to set up and manage your company properly to benefit. Follow the steps above or work with an accountant to incorporate your business. Take action today to maximize your after-tax income.