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How to Switch from Sole Trader to a Limited Company


If you are a sole trader, you have probably considered switching to a limited company before. Exactly what this involves and the best way to do it will be covered in this short guide.

This article covers:

  • How does a limited company differ from a sole trader?
  • Is a limited company right for you?
  • Steps to take to switch to a limited company
  • Get help from an accountant

How does a limited company differ from a sole trader?

If you’re not sure on the difference between the two, here’s a quick rundown of the differences.

The main difference is that a limited company is considered a separate legal entity from the individual who owns it.

The next most important thing to remember is that tax is slightly different if you have a limited company. As it’s a separate legal entity, you must file taxes for the company and for yourself as the owner/director separately.

Where a sole trader only has to worry about income tax and National Insurance, a limited company has a few more things to think about. A limited company must pay Corporation Tax and also think about dividends and employer’s national insurance.

Is a limited company right for you?

As a limited company requires a bit of extra work in terms of tax, is it right for you? While limited company taxes are more complex, there are certain situations where it’s more beneficial. You may even save money by switching to a limited company.

Pros of a limited company structure

  • Save money on tax - Corporation Tax is 19% whereas income tax is 20% and above for higher tax brackets.
  • Save money with dividends - Most accountants will advise you to take your director’s salary up to the National Insurance limit and the rest as dividends. That’s because the dividend tax rate starts at just 7.5% which is considerably lower than the income tax rate.
  • Limited liability - Another benefit with limited companies is that there’s a legal separation between you and the business. This saves you from personal liability of company debts.
  • Credibility - Some clients and customers will prefer to work with limited companies because there’s a degree of greater credibility.

Steps to take to switch to a limited company

Switching to a limited company isn’t as complicated as it sounds. Here are some simple steps.

Tell HMRC

The first step is to tell HMRC of your desire to switch to a limited company. You can do this easily online.

Make important decisions on company structure

Before you register, you will need to work out who the company directors, shareholders and people with significant control will be. All of these details must be submitted when you register your company.

Choose a name

Another decision you will need to make is what name you will register under. This will be public information and can’t be the same as another registered company’s name. This doesn’t necessarily have to be the name you trade under.

Register with Companies House

As a limited company, you must register with Companies House to get a certificate of incorporation. This will register you for Corporation Tax too. Registering a company costs just £12 and can be done online. While registering a company, you can also register for PAYE to start employing staff.

Get help from an accountant

If setting up a limited company sounds like something you’d like help with, an accountant can steer you in the right direction. At Countplus, we provide a full company incorporation service to get you up and running. From there, we can also make sure all your tax affairs are handled correctly and in the most tax-efficient way possible.

For a friendly chat or more information, get in touch with Countplus today on 01925 670 289.