There are many different business structures available, but What saves you the most tax?. Sole traders, partnerships, limited companies and more. Which one is best for your situation?

In this episode of I Hate Numbers I'm going to look at What saves you the most tax? I will look at the difference between the different taxes for sole traders and companies, paying yourself, which structure makes you more money.

My FREE online tax calculator will show you the total tax to pay for both business types, give you options and help you plan. Subscribe now!

You'll learn about all your options in this podcast episode of I Hate Numbers. My FREE online tax calculator is ready and waiting for you.

Sole Trader vs Limited Company Tax Calculator

You can't decide 'What saves you the most tax?' without looking at the numbers. Moreover, how it works and how much you pay, and which is better. When it comes to crunching the numbers, I have just the thing for you! FREE online calculator.

The best way to find out if a limited company or sole trader is right for your business is by using my free online calculator tool. It will help you work out what's best for your needs based on your circumstances.

Click here now to get started. My free online sole trader versus limited company tax calculator shows the tax you will pay, personally and business wise. You can see your take home pay from both options. Use the sliders to see the impact of changing profits, salaries, and dividends

You do not have to worry about making this decision alone! Contact us to see how we can help How to decide which type of stricture is best for you. Arrange an initial chat to talk options Our news section, FREE online calculators is there for you. Just click here now to get started!

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

What's the best business structure to save you the most tax? That's a great question. It's a question, in over 26 years of running my own firm, that is a very popular, and a very common question. The short answer is, it depends. Hi folks. Welcome to episode 59 of I Hate Numbers, hosted by me, Mаhmood Reza, accountant, educator, and mentor.

I've been running my own practice for over 26 years and my mission in life is to improve your money mindset, for you to make more profit in your business, for you to save time, save tax, and have the business that you deserve. Now in this week's podcast episode, I'm going to be looking at the difference in how sole traders are taxed and company taxes.

I'm going to outline a couple of things in terms of which one is best for you, and what you need to take into account when you're actually deciding what the best business structure is, and share a couple of tips with you as well. Now, if we remind ourselves of last week's podcast episode where we introduced this idea of business structures, we talked about sole traders, and that's somebody working on your own account, so that's you, the individual.

In tax and accounting terms, we're looking at the profits that you make. The second thing is a limited company, and remember, when you create a limited company to run your business through, you create a separate legal person, and in legal, accounting, and tax terms, that thing, that virtual invisible creation is a person in its own rights.

Think of it in these terms. Once you create a company, that company effectively is your boss, you know, that's your employer. Obviously, in reality, you are one of the same, but your status has changed from a sole trader to now becoming a shareholder and a company director at the same time. The big differential between the two business types

is one particular tax that tends to get overlooked by money. It is a tax. It looks like a tax. It has the same impact as a tax i.e. taking money that you've generated, and it's called national insurance. And we're going to revisit that in a few moments in this podcast. Now, in overview terms, and I don't want to get too heavy on the numbers,

I don't want to go down a rabbit hole or make you lose the will to live by throwing loads of numbers at you. For the detailed number crunching, visit the show notes. There's a link to a superb, if I do say so myself, online tax calculator, where at a click of a mouse, just type in some figures and hey presto, the numbers will appear,

show you what your tax to pay is under a sole trader or as a limited company. More of that later on in this podcast. Now, firstly, let's look at the sole trader. If you are operating as a sole trader, and there are millions of you up and down the country, then as far as the tax man is concerned, the tax that he's going to impose on you, that he's going to take out of your pocket will be based on the business profits that you generate.

And that is irrespective, by the way, whether you spend all those profits, whether that money's left in your business bank account. Once you generate and earn it, tax is levied on the whole pot. So, once you've worked out your business profits, you are allowed some of it free, that's good news, and that's free from what's called income tax.

And then, you pay income tax on that according to how much is left over. And again, the amount you pay depends on what's called your status. So, whether that's a basic-rate taxpayer, typically when income goes up to a certain level, for the 21/22 tax year, just over 50k, if you are in that situation that you run a sole trading business and your profits go over that figure, and/or you've got income from elsewhere, then you potentially pay it 40%, and then you go up to the eye washing rate at 45%,

once you get to 150k. That's it. Simple, straightforward, and then that's the tax that you'll pay here. Now, another tax that's often overlooked, and it sometimes catches people unaware when they operate as sole traders, is what's called national insurance. Now, national insurance has been with us for about 70 plus years, and typically national insurance for the sole trader, or if you want to put your HMRC hat on, the self-employed have two types.

You've got what's called a class two. Now, the class two, by the way, is the one that gets you entitlements to state benefits. It also adds to your state pension entitlement. And in the United Kingdom, you need a 35-year national insurance record to get full entitlement to state pension. So, there's a bare minimum.

Hopefully, your profits will be in that situation where you pay those class two. Now, that's great. It's a relatively modest rate at about three pounds a week. You might think that's great. That's not a great deal to worry about, but then you've got what's called class four national insurance, and again, for the year that we are in

as this podcast is being recorded, just over 9,568, you pay class four at 9%. And again, don't worry too much about memorising these rates. Check out the calculator, check out the show notes, and those numbers will be there. Effectively, if you want to look at it in very simplistic crude terms, as a sole trader, your actual tax rate, once you've gone past the free amounts, is about 29%.

So, it's not just the 20% headline rate, it's 29%. Okay, let's now go into a company and see what happens there. Now, when you are looking at your company, there are going to be two slices taken out of your profit cake that constitute the tax. The first slice is the tax that your company will pay. So remember, that's not you as the individual, that's your limited company, and that will pay tax

that's called corporation tax. Now, corporation tax is a regime that applies to limited companies. Whether you are not-for-profit, whether you're limited by shares, whether you're a CIC, whether you're a sports club, corporation tax covers those entities. So, you pay corporation tax on your business profits, which is typically what you invoice less all your costs.

Now, in this case, what a business cost is, there may also take into account money that you pay yourself, depending on how you remunerate yourself. Now, when it comes to yourself, you obviously need money out of the company. It belongs to you, it's yours. And when I look at the tax burden an individual will pay, you've got to look at that, how that money is taken out.

And there are two common ways that money is extracted from your company. Number one, you withdraw that money under what's called a PAYE scheme, and PAYE, by the way, stands for “pay as you earn”. It's applying to employees, and if you register your company as an employer and you pay yourself under an official payroll scheme, then that money that you take out is classified as proper wages.

It's a business cost, and you then, potentially, as an individual employee, director of your company, will then potentially pay tax on that income as well. Now, the tax that you pay will be two types. There will be income tax on that salary, and there will also be national insurance on that as well. Now, when it comes to your company, by the way, there's another type of national insurance.

There's the national insurance you pay as an employee. And surprise, surprise. These were at different rates compared to the self-employed. They tend to be higher, but also your company, as the employer, is also liable to pay employer’s national insurance, and it's an eye-watering rate of about 14%. Now, just to make life easy, or not as the case is in the world of tax, there's no such thing as consistency in harmony.

So, depending on the amount of money that you earn, depending on the amount of salary, et cetera, et cetera, then it will determine the rate and the amount of national insurance that is paid. They are not the same rate as income tax. They tend to be at much lower levels. And a typical tax planning strategy for most people operating companies is to set the salary relatively low, enough that you pay some national insurance, which goes towards your state benefits and pension entitlement, but also not too much that you don't end up paying employers’ national insurance, or certainly not too much of it.

And typically as a benchmark, salaries are normally recommended between about eight and a half and 12,000 pounds a year. Now, the advantage of such a salary at that level is that you pay relatively small amounts of national insurance. The company doesn't really pay any employees national insurance, and that's bingo.

The rest, in theory, belongs to you. You can take it out of the company by what they call dividends. Now, there are a couple of caveats here that may seem great, but when you withdraw that money as a dividend, dividends are effectively not considered a business cost. This is just you taking the profits out of your business for your own personal use.

Perfectly fine, perfectly legal, perfectly legit, and again, that's what you're in business to do, to generate prosperity for yourself, and to support yourself and your family, and sometimes your friends as well. Now, when dividends are withdrawn again, now why should life be simple when it comes to taxation?

You don't pay national insurance on that, which seems like a good thing. Dividends do not count as business costs. So again, you pay more corporation tax. And then, when that dividend comes out, do you think it's going to be at the same rate as your salary as self-employed profits? Absolutely, 100% correct,

it's not, and they go at different rates. If you are what's called a basic-rate taxpayer, dividends are taxed at a certain level, seven and a half percent. Over that, once you become a high-rate payer, they jump up to 32 and a half, and then, once you get to the eye-watering 150, they become 38%. Now, I'm simplifying something, which can get quite messy.

Again, when it comes to the number crunching, do check out the calculator. But the key thing is, for me, when you look at tax efficiency, you've got to look at the whole shooting match. So, when you look at running a company, you've got to look at the tax your company pays, and then factor in also how much tax you'll pay as an individual on the monies that you withdraw from your business.

When you're a sole trader, it's slightly more straightforward because you pay tax on the whole lot. Now, which one is best? Well, let me share a few thoughts with you. Purely looking at tax, ignoring any other considerations about the best business structure, and I certainly would not just develop a tax strategy without considering other aspects.

I certainly would not choose a business structure purely on tax alone, even though it's a major factor, it's not the only kid on the block. It's not the only thing you need to consider and take into account. Having said that, if we're purely talking tax, then around about 20,000 a year. They're relatively neutral.

So, if you generate money in your company, take all the money out of the company after paying your company tax bill, compare that to a sole trader. There's not a great deal of difference between the two. As the company's profitability increases, as your business increases, the level of profits that it creates, then,

it's tips favor in the company. Now, here's the key positive why I think, on balance, a company is better. It's about options and a lot of the what is the best, it depends on your own personal circumstances, how much money you need to withdraw from the company, how much money you need to live on. And if you've got a situation where you largely need a modest income, but you're making high profits, then a company favors itself because you can control how much money you withdraw.

There is a downside as though you would expect in any form of tax planning because that money stays in your company. You need to get your hands on that, and if that's scratching your head, you know, you've got to think of a number of ways to extract that and there are options. Please, do check out previous podcasts where we talked about benefits.

We are going to revisit that topic again, but in general terms between the two, a company, assuming it's not a personal service company, tends to outweigh the sole trader. Obviously, one has to consider also the cost of running a company, the cost of any advice and support you receive. But in general terms, if you are able to control how much money you need to live on, if you don't actually need all that money immediately,

if you want to keep your income below a certain level, perhaps for child benefit, then a company ticks the boxes. Okay, folks, I hope you found this useful. Please, do check out the show notes and the wonderful online calculator, one of a basket of calculators that we have to help you and your business.

I'd love it if you could subscribe to the show, share it with your friends, family, and colleagues. Until next week, have a fantastic week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.