Customers and new inquiries always ask me, ‘Should I have a Company or be a sole trader?’
I’m writing a guide to answer this question and will share some inside information about what I discovered.
First, I have looked at small businesses with profits of up to £50k.
Second, I have looked at small businesses with profits of between £50k-£100k.
Example: operating profit of £50,000 to £100,000
A sole trader in England, Wales, and Northern Ireland will now pay 20% income tax and 6% national insurance for a combined tax rate of 26% on earnings up to £50,000 and 40% income tax and 2% national insurance for a top rate of 42% on their earnings up to £100,000.
In Scotland, the tax rates are different, and a sole trader will pay either 19/20/21/42% or 6% national insurance for a combined tax rate of 25/26/27% or 48% on earnings up to £50,000 and 42% or 45% income tax and 2% national insurance for a top rate of 44% or 47% on earnings up to £100,000.
A company will pay 19% corporation tax, and 8.75% income tax is paid by shareholders who receive dividends for a combined top tax rate of 27.75% on earnings of £50,000 and 26.5% corporation tax and 33.75% income tax are paid by shareholders who receive dividends on earnings between £50,000 and £100,000.
The income tax rates on dividends in Scotland are the same as those in England, Wales, and Northern Ireland.
Comparing tax and profits between a sole trader and company owner, assume that:
- This is the owner’s sole income source, with a complete personal allowance and basic rate tax bands available.
- The company owner takes a small salary and can’t claim the Employers Allowance.
- Dividends are used to extract all remaining profits from the company.
- They are under the state pension age and pay national insurance.
- The company has no associated companies and is a trading, not an investing company.
2024-25 The savings between a sole trader and a company are as follows:
*Note these are the tax rates for England, Northern Ireland, and Wales. Scotland, which has a different rates.
Profit level £ | *Taxes payable Sole Trader £ | Taxes payable Company £ | Saving of Sole Trader £ |
60,000 | 13,889 | 12,766 | -1,123 |
70,000 | 18,089 | 17,745 | -344 |
80,000 | 22,289 | 22,876 | 587 |
90,000 | 26,489 | 28,006 | 1,517 |
100,000 | 30,689 | 33,137 | 2,448 |
**Note these are the tax rates for Scotland, which differ from those for England, Northern Ireland, and Wales.
Profit level £ | **Taxes payable Sole Trader £ | Taxes payable Company £ | Saving of Sole Trader £ |
60,000 | 15,695 | 12,766 | -2,929 |
70,000 | 20,095 | 17,745 | -2,350 |
80,000 | 24,495 | 22,876 | -1,619 |
90,000 | 28,895 | 28,006 | -889 |
100,000 | 33,295 | 33,137 | -158 |
Conclusion
On the face of things, a business earning between £50,000 to £100,000 a year would be slightly better off being a company at the £60,000 point.
If you earn above £50,000 to £100,000 in Scotland, a company will always benefit you by paying less tax.