Customers and new inquiries always ask me, ‘Should I have a Company or be a sole trader?’
I’m writing a guide to answer this question and will share some inside information about what I discovered.
First, I have looked at small businesses with profits of up to £50k.
Second, I have looked at small businesses with profits from £50k to £100k.
A sole trader in England, Wales, and Northern Ireland will now pay 20% income tax and 6% national insurance for a combined top tax rate of 26%.
In Scotland, the tax rates are different, and a sole trader will pay either 19/20/21/42% or 6% national insurance for a combined top tax rate of 48%.
A company will pay 19% corporation tax and 8.75% to shareholders who receive dividends for a combined top tax rate of 27.75%. The income tax rates on dividends in Scotland are the same as those in England, Wales, and Northern Ireland.
Comparing tax and profits between a sole trader and company owner, assume that:
- This is the owner’s sole income source, with a complete personal allowance and basic rate tax band available.
- The company owner takes a small salary and can’t claim the Employers’ Allowance.
- Dividends are used to extract all remaining profits from the company.
- They are under the state pension age and pay national insurance.
- The company has no associated companies and is trading, not an investment company
2024-25 The savings between a sole trader and a company are as follows:
*Note that these are the tax rates for England, Northern Ireland, and Wales. Scotland has a different rate, which is shown below.
| Profit level £ | *Taxes payable Sole Trader £ | Taxes payable Company £ | Saving of Sole Trader £ |
| 10,000 | 0 | 0 | – |
| 20,000 | 1,932 | 2,249 | 317 |
| 30,000 | 4,532 | 4,858 | 326 |
| 40,000 | 7,132 | 7,466 | 334 |
| 50,000 | 9,732 | 10,075 | 343 |
**Note that these are the tax rates for Scotland, which differ from those for England, Northern Ireland, and Wales, shown above.
| Profit level £ | **Taxes payable Sole Trader £ | Taxes payable Company £ | Saving of Sole Trader £ |
| 10,000 | 0 | 0 | – |
| 20,000 | 1,910 | 2,249 | 339 |
| 30,000 | 4,542 | 4,858 | 316 |
| 40,000 | 7,242 | 7,466 | 224 |
| 50,000 | 11,273 | 10,075 | -1,198 |
**Note that these are the tax rates for Scotland, which differ from those for England, Northern Ireland, and Wales, shown above.
Conclusion
On the face of things, a business earning less than £50,000 a year would be slightly better off being a sole trader unless you’re in Scotland and earning above £45,000.