Last year we wrote an article for our newsletter looking at whether you would pay less running your business through a company, rather than as a sole trader. From April 2024, with the reduction in Class 4 National Insurance for the self-employed coupled with the drop in the dividend allowance to just £500, we thought we would look at this again to see how the figures look now. As a comparison, the 2023/24 version can be found here.
Whether to operate through a company always depends on the taxpayer’s individual circumstances and what the numbers show. Historically, when dividends attracted a basic rate tax credit, it was relatively simple as, once profits reached a certain level, it became more tax efficient to operate through a limited company. Nowadays, it is not that simple as the following examples show.
Full workings are shown below in Appendix 1, but to summarise, the total tax liability of our examples for 2024/25:
This article assumes the following:
These examples refer to the 2024/25 tax year only, subject to any changes which may be announced in year.
They also assume that the company is a single director company and therefore unable to claim the Employment Allowance. If the company would be entitled to claim this, a salary taken up to the personal allowance of £12,570 would produce a small saving compared to the above figures.
The above figures only consider a trader below the state pension age. Where the trader is over state pension age, no National Insurance would be due, meaning being a sole trader could be much more beneficial.
The additional costs of running a company, such as higher accountancy fees (due to greater reporting requirements) have not been factored in. There might also be the additional cost of running a PAYE scheme.
These examples assume that all company profits would be distributed as dividends. Additional savings can be made where profits are left in the company, rather than drawn as dividends.
Dividends are taxable on the shareholder as these are declared, so the timing of personal income can be controlled. Sole traders are taxed on income as it is earned, regardless of whether they take this in drawings or not.
The examples are merely for illustrative purposes only. Each business will differ.
Whilst tax is always going to be an important factor in deciding what business structure you operate through, there are other advantages and disadvantages to both. Please speak to us, so we can do the numbers and help you to decide what works best for you.
Appendix 1
What would the tax position be if my taxable profits were £30,000 in 2024/25?
What if my taxable profits were, say, £60,000?
What if my profits doubled to £120,000?
