As an accountant I am often asked by potential clients “what route should I take?” or “what is better for me?” in reference to being a Sole trader or operating via a Limited (Ltd) company. It is an age old dilemma and the question will never be resolved universally, it is ultimately up-to you the individual and your accountant, and depends solely on your personal and employment situation. However, I am going to try and help steer you in the right direction…
Firstly, it must be highlighted that every business must have an operational and legal structure, and a Limited Company and/or Sole Traders are simply two of the more common operating models/legal structures for a business. Nearly 2 million U.K businesses operate as Ltd Companies, and more than 3 million operate as Sole Traders, the latter being the most popular and simplest to form.
Secondly, it must be highlighted, whichever route you take; you’ll need to set up your company via Companies House for statutory accounts submission and register with HMRC for Taxation purposes, and may need an Accountant to support you with every step ; I always recommend finding yourself an accredited Accountant. (I have experienced some clients that have done their accounts in previous years on their own and not only has it cost them financially, but also on a personal level…)
What is a sole Trader and how does one operate?
A sole trader is a self-employed person who is the sole owner of the business. Tax rates are set for each tax year from 6th April – 5th April, income and gains are taxed for the tax year based on those rates. No deduction is available from trade profits for private expenditure. Sole traders have unlimited legal liability.
What is a Ltd Company and how does one operate?
A Ltd (limited) company is a business structure that has its own legal identity, separate from its owners (shareholders) and managers (directors). Tax rates set for the financial year are from 1st April to 31st March. Private expenditure by directors/employees is allowable but the individual will be taxed accordingly thereafter. Trade profits are charged corporation tax. (18/19 rate 19%) Shareholders (owners) have limited liability.
Advantages and Disadvantages
Both business structures – Ltd Company and Sole Trader routes have their own advantages and disadvantages, below is a summary of key advantages and disadvantages:
In summary, the decision will ultimately be down to you; however you should seek advice from an accountant, who should be able to talk you through a forecast set of accounts and highlight key issues for both (Ltd company and Sole Trader) and guide you to the more advantageous structure for you. The bulk of my practice clients tend to take the Ltd company route as it is deemed more financially viable for them as contractors; (I am sure you will find this to be the case for many of your Locum Pharmacist colleagues and friends) and we (Accountants) endeavour to minimise the burden of administration on you when operating as a Ltd company.
Eventually on a permanent or temporary nature, some of you (Pharmacists) tend to give up the life of being a Locum Pharmacist and find an employed role for a “Multiple” or “Independent;” I will not discuss the advantages and disadvantages of this route vs. being a Locum, however I will briefly advise you to ensure the following when taking this route:
- Company dissolution/closure is done in a timely and legally abiding manner relieving you of your responsibilities with HMRC and companies house. (Your Accountant will support you on this matter)
- When in employment with an organisation, you as an employee will now pay Tax and National Insurance (N.I.) contributions at source – your employer will deduct these at applicable taxable rates prior to you receiving your monthly salary payment, however employers often don’t consider your individual needs and account for tax-deductible expenses relating to your profession and employment, thus you are often over-paying on Tax and National Insurance (N.I.) contributions, if you still have an Accountant or can identify and contact one, I would recommend you do so – you can often recover such over-payments which can be significant, often at a small or marginal fee in comparison to how much you can/have recovered
I hope the above has helped inform and guide you in the right direction for you and potentially saved you money!
Abdul Khalid ACMA CGMA
Partner at Accountants for Professionals
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