Self Employed or Limited Company: What’s the Difference?

self employed or limited company

One of the important business decisions you need to make before you kick start a business venture is choosing a business structure: will you work as a self employed or limited company? Which one will be best for you? We’ll discuss the differences between both to help you choose the best one.

Although there are other legal structures to choose from like limited liability partnership (LLP), however, working as a limited company or carrying out business as a self-employed are the most popular business structures in the UK. Let’s see: what are the risks associated with both, what are the tax implications and what are the administrative responsibilities? Read on till the end to decide which one suits your circumstances.


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Self Employed or Limited Company: Financial Risk

If you want to become self-employed or register as a sole trader, you need to inform HMRC about your status. And to work as a limited company, you need to register it with Companies House to get started with your business operations. Knowing the financial risk of both is crucial to decide between the both.

As a sole trader or self-employed person, you and your business are taken as one person. It means you and your business are the same. Here you are liable for all the business liabilities and debts incurred by the business. It means your personal wealth or assets are at stake, as these can be sold or used to pay your liabilities and debts.

People who don’t want to involve their personal finances in a business prefer to set up a limited company instead of working as self-employed. A limited company has its own existence. It is a separate legal entity. In this structure, your personal assets are protected in case of any loss, debts or liabilities.

This means if a company face financial crises or is declared bankrupt, your company is liable for it, not you. In this way, your personal assets are safe in a limited company, unless you are involved in any fraudulence or crime.


Self Employed or Limited Company: What are the Tax Implications?

A limited company needs to pay Corporation Tax (19% of profits less allowances and reliefs) on all the profits earned. Directors of the company are taxed personally on the income taken out of a company. They are taxed through annual self-assessment. Alongside, they also need to pay dividend tax on the amount of dividend they receive (not on the first £2,000).

Class 1 Employees’ NICs and Income tax are payable on the salary paid to the employees or directors. The company also needs to pay Class 1 Employer’s NIC on salaries paid. The amount directors will pay depends on their taxable income (income tax band):

  • 7.5% on earnings up to £37,700 (basic rate)
  • 32.5% on earnings £37,701-£150,000 (higher rate)
  • 38.1% on earnings above £150,000 (additional rate)

A limited company needs to register for VAT (value-added tax) if its turnover reaches £85,000 or more per year (2021/22)

Self-employed persons need to pay tax on all the profit they make in a year. They need to pay tax through the process of self-assessment. They are also liable to pay Class 2 (if profits are £6,515 or more a year) and 4 NICs ( profits are £9,569 or more) on a weekly or annual basis as per the amount of profit reported. Class 4 NICs will also be paid by self-employed as follows:

  • 9% on profits between £9,569-£50,270
  • 2% on profits over £50,270

They are entitled to a personal allowance of £12,570 a year (2021/22) on their income that is non-taxable.

They income tax self employed people need to pay is:

  • 20% on £12,571-£50,270 income (basic rate)
  • 40% on £50,271-£150,000 (higher rate)
  • 45% on £150,000-plus income (additional rate).

Similar to a limited company, self-employed people also need to register for VAT if their turnover reaches £85,000 or more per year (2021/22).


self employed or limited company


Limited Company or Self Employed: Administration and Costs

Limited companies need to register with Companies House. They are required to inform the registrar of companies about any changes by filing a Confirmation Statement and PSC on annual basis. They also need to send a copy of their company accounts. A limited company can be formed with only £100.

There’s a lot of hassle in forming a limited company and managing its finances, so count on our accountant to deal with HMRC and Companies House on your behalf.


Need help with company registration? Reach out Today!


On the other hand, self-employed people need to keep accurate records and need to comply with government regulations. They must register for self-assessment to report their income.

Learn more on the government website.


Quick Sum Up

We hope that now you can decide which business structure to go for: self-employed or limited company. You have understood the administration, legal and tax implications of both. Before deciding the business structure you need to know what sort of company you want to operate. If you want to start a small company, being self-employed is a better option. If not, then registering as a company is recommended.


Whether you want to incorporate your company or need to register as self-employed? Get help from our cost-effective, reliable and experienced professionals at Accounting Firms to sort out your financial woes. Register now for free to connect in under three minutes!


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Disclaimer: This blog is written for general information about the topic.

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