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Sole trader vs. limited company tax

There are quite a few differences in how sole traders and limited companies are taxed. Choosing which set-up is best for you is an important decision.

Profits vs. salary and dividends

As a sole trader you are deemed to be self-employed and you pay higher taxes but keep all the profits after tax. A limited company, on the other hand, pays less tax, with directors drawing a salary and dividends from the company earnings.

NI and income tax vs. PAYE, NICs and dividend income

A sole trader pays Class 2 and Class 4 National Insurance contributions (NICs), as well as income tax on the taxable profits of the business. With a limited company, employees and office holders pay PAYE and NICs on their earnings, depending on their income levels. Dividend income also attracts its own separate tax, starting within the basic rate band.

Tax implications when withdrawing cash from the business

As a sole trader, your income determines your tax liabilities, so any cash withdrawals from your “business” won’t affect your personal tax position. It works a bit differently as an owner (shareholder) of a limited company. You are taxed on any income you withdraw from the company – it will either be taxed as a dividend or as salary income.


Read more on limited company tax


Contact our experienced consultants if you are unsure as to what type of business structure you should use. We’ll help you make the right decisions based on your particular circumstances.

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