TAX BASICS

How to register your Business in the UK?

There are different ways and legal structures to register your business. It really depends upon how you would like to structure your business. Some factors that you must consider are how much control you want, the type of work you’ll be doing, and your long-term plans. It is possible to change your status later, as you become more established and the business needs change. But obviously, it would require additional administration.

What is a Limited Company?

A limited company is a business structure that has its own legal identity, separate from its owners and managers. The decision-making and operation of the company are the responsibility of the director. However, if you register your business as a limited company that doesn’t put yourself or your personal assets liable for the business. The business and the director are two separate entities in front of the law.

Sole Trader

A sole trader is an individual who has complete ownership of the business and is also personally liable for the bills of the business.

What is an umbrella company?

An umbrella company acts as an intermediary between you and your agency or client. The umbrella company deals with a lot of the administrative side of things, particularly concerning tax and payroll. If you register your business as an umbrella company you become an employee. Your tax, pension, and NI contributions will be directly deducted from your income since you are an employee. However, statutory employment benefits like sick pay and holiday pay are an entitlement.

What are the advantages if you register your business as a limited company?

  • The primary advantage is the protection for the director’s personal finance and assets. Even if something goes wrong the director is not held personally liable.
  • The potential for profit is much higher in comparison to a sole trader. Since the profits generated in a sole trader business are calculated as income. Hence, you’ll pay income tax and National Insurance Contributions (NIC) based on government thresholds.
  • As a limited company you pay corporation tax, currently at 19%, on your company profits and you can also pay yourself through dividends and salary. This helps you to minimize PAYE (tax you pay on your earnings throughout the year) and NIC outgoings. 
  • You can also claim more business expenses through your limited company than as a sole trader. Consult expert accountants or let them do the work. Regarding the claimable expenses, the HMRC has laid out strict rules on expenses that can be claimed.
  • Expenses claimed will be deducted from the company’s profit and hence will not be taxed.
  • A limited company can establish its own credit rating to borrow capital to grow business.
  • Professionalism increases confidence among others and some large corporations simply prefer to work with limited companies, but others don’t work with unincorporated businesses. Having a limited company can open new doors and it’s also much easier to raise capital providing ample opportunities to grow.

What are the advantages if your register your business as a sole trader?

  • First and foremost it is simple and inexpensive to start up.
  • Both the sole trader and the director of a limited company must submit the personal self-assessment to the HMRC. But those operating a limited company must also submit extra paperwork to regulatory authorities (Corporation Tax, Annual Accounts, VAT returns if VAT registered). As a sole trader, you save a lot of time and effort with these returns, and also if a limited company fails to submit on time then significant fines and penalties will be charged.
  • Compared to limited companies the accounting process is much simpler and cheaper.
  • Legally, limited companies must be transparent and share certain information with the public but as a sole trader, you don’t have to provide this information to Companies House.

What are the advantages if you register your business as an Umbrella Company?

  • Simplicity is a major advantage. The tax deduction is already done and thus prevents you from unexpected tax bills. You receive the pay along with a payslip and the breakdown calculation.
  • It’s very flexible, free from the stress of running your own company, although this does mean you work as an employee.
  • You get the statutory benefits of an employee, such as SSP (Statutory Sick Pay), SMP (Statutory Maternity Pay), and SPP (Statutory Paternity Pay) 

How are taxes paid?

Sole traders pay income tax on their business profits by way of an annual self-assessment tax return. 

In a limited company, the salary you pay yourself as a director is subject to PAYE tax. Which is deducted at the appropriate rate and paid at regular intervals to HMRC.

The company pays corporation tax at 19% of its taxable profits. Expenses such as salaries and pension payments can be deducted from the income. These are tax deductable since it is a needed expense for running the business.

Corporation tax is payable 9 months after the company’s year-end. Also, 12 months after year-end a tax return must be filed by the company. The profits available after paying the corporation tax can be distributed amongst the shareholders.

The first £2000 dividends are tax-free, and above that dividend tax is payable through your self-assessment tax return.

Sidharth Bharthan Menon
CEO, taxtotal​