Limited Company Structure: Potential Perks, Tax Savings & Costs

Limited Company Structure: Understanding The Potential Perks, Tax Savings & Costs

Are you thinking about making the leap from sole trader to limited company? Well you’re in the right place! So grab a cuppa and let’s get into it.

As I am sure you already know, there are a number of factors to consider when deciding if transitioning to a Limited Company structure is  going to be right for you and your business. From the considerations around your business goals and aspirations, to funding, expansion and exit plans, along with looking into the norms in your particular sector or industry, they all play into this important decision. And of course we can’t forget about the potential financial and tax-saving advantages to be had.

Lately, many small business owners have been curious about ‘when’ it’s beneficial to make this transition, from the tax planning and money -saving side of things. The answer isn’t entirely conclusive or straight forward. Not least…the ‘is it worth it‘ threshold varies from person to person. The right balance between money saved vs. effort of implementing and running a limited company structure is a subjective and often personal matter.

What’s ‘worth it’ to you?

I did a poll of small business owners on this recently – to understand, if we consider it from a potential money saving point of view, how much would you want to be saving through a Limited Company structure, to make it feel ‘worth the hassle’ of switching. The answers were quite wide ranging – with a number voting along the lines of  ‘any saving at all is a victory’ all the way to up to a number who thought it would need to be likely to produce multiple £’thousand savings to make it seem ‘worth it’ in their eyes.

Of course, as we’ve touched on, there are other very valid reasons – it’s not all about the potential for more lucrative financial decision making. But it is still an important consideration for small business owners. So let’s take a look at what the potential savings and costs could be vs. a soletrader structure. And let’s aid your decision making of, if and when, it might be right for you and your business to go Limited.

Potential Savings to be had under a Limited Company Structure

You get to choose ‘how’ and ‘when’ you extract your earnings

As a sole trader, it’s simple: your trading income minus business expenses equals taxable earnings – there is little wriggle room for tax planning. But, when you’re a Limited Company Director/Shareholder, you have a little more scope to decide how you will take out and ultimately get taxed on your company earnings. You have probably heard talk of taking a mix of PAYE salary and dividends (paid to you out of your profits). This is common approach to enable owners of limited companies to decide how the will be paid, according to their business situation, needs and goals, which can be planned around the relevant dates and tax boundaries. Of course, this is going to be super interesting for people who are around the higher rate tax band but there can also be savings from around £30k earnings.

Enjoy employee-style £££ ‘perks’

Many Limited Company Directors take on a dual status in their company, that of a Director/Shareholder AND also as an employee. With your employee hat on, your company can pay for things  for you, that are appropriate and sometimes a duty of care, to provide to their employees – here we’re talking about things like eye tests, some office/wellbeing initiatives, some company events/parties, along with trivial benefits. And did you know that Directors can also pay themselves £300 annually tax free in the form of non-cash vouchers.

Plus the rules are a little more relaxed around things like claiming expenses for business related meals out, snacks and coffees on the go or while working from a cafe etc. Things that are typically a lot more restricted if you are a soletrader. You can reimburse yourself for taking clients out (which you can’t claim as a soletrader), although this is not deductible against Corporation Tax. 

 How much this adds up for you , will depend on your typical work and travel patterns and the type of expenses you typically incur in day to day life -it probably want be a deciding factor, but it could well be quite a significant amount.

Other people close to you can join as directors /employees which can have tax planning advantages

Rather than extracting earnings through just one person (you!), you could have say a partner or family member join on the payroll and/or holding a directorship which can have an advantage in terms of both of your tax bands and personal allowances. Note there are other considerations to this type of involvement and we recently explored the legal side of things, in our recent guest blog, from Legal Director, Kit O’Brien.

Company pension contributions

Your limited company can contribute a significant chunk to your pension, which can be quite a tax efficient way to extract profits from your company, boosting your pension fund and an added benefit  is that  these contributions are deductible against corporation tax. It’s of course always a good idea to chat over pension strategies with an IFA.

Now we’ve explored some of the key tax saving benefits, let’s take a look at:

The potential costs of moving to a Limited Company Structure

Costs to set up the limited company

Actually this isn’t maybe such a big expense as you might think. You can register a Limited Company from as little as £12. However, you may wish to have further support with this, perhaps incurring the cost of using a separate registered office or getting a professional or company to help you through it. And if you are forming a Limited Company with someone else, it’s wise to get a shareholders agreement drawn up.

You will also be required to file a confirmation statement, to confirm you limited company details, which is currently just £13 and something you must to do annually.

And depending on your arrangements, you may well incur monthly banking fees for having a limited company bank account, depending on who you choose to bank with and any particular initial incentives.

Filing Company Accounts and Tax Returns – accounting fees

As a Director you become responsible for meeting the filing and reporting obligations on behalf of the company. As a soletrader you might well be doing your own personal taxes returns or paying a more nominal fee for basic accounting support. However, with a Limited Company you will need an accountant to help you prepare and file company accounts with Companies House and Company Tax Returns which go to HMRC, alongside your personal tax return. Specialist software, skills, experience and accounting knowledge and some professional judgements are often needed to get this right so you’ll need to engage an accountant to help you meet these obligations.

Accounting Software

Currently, though it is set to change by 2026, you can maintain your accounting records for a soletrader business ‘offline’ in a spreadsheet or even (though its’ not advisable) a pile of paper you sort out once a year. But it’s the norm now to run your Limited Company on accounting software like Xero , this often links through to your Accountants’ accounts prep/tax software, which in turn talks to HMRC.

There are also many benefits to using accounting software to help you keep on track of your business numbers in real time. This helps you keep track of how things are going, and informs business decisions. You will likely also save time through using automations within the software that help you with recording your transactions and maintaining your accounts. Invoicing clients and managing overdue balances becomes a dream and its simple to review all the  important data that helps you run your business more easily. Sometimes there are deals on or you can access software free with certain bank accounts, otherwise you are looking at a monthly fee for software.

Final Thoughts and next steps

As I mentioned earlier, there are many other important factors to consider when deciding if transitioning to a limited company is the right step for you. This brief overview of potential savings and costs provides a glimpse into the world of limited company structures and benefits.  I was thinking about sharing some more detailed limited company tax workings, I’ve decided to hold those examples for now as there is already quite a bit to think about! However, if you are interested in getting some more specific guidance or advice for your situation, feel free to reach out to me. I’d love to explore this journey with you and I will give you a fair, honest and no-obligation initial assessment.

It’s worth noting that the government can make changes that affect the implications and incentives mentioned at any point. For example, the dividend tax-free allowance has changed from £5,000 in 2018 to what will reportedly be just £500 by April 2024. As ICAEW Chartered Accountants, we keep up to date on our knowledge through regular CPD training to keep informed of the latest picture and best practices and are constantly reviewing the most appropriate /tax efficient structures in light of changes. 

So please be aware that the information provided in this article is accurate as of this publication date but the situation  might have changed by the time you’re reading this. For the latest advice and updates, connect directly with Harriet, who will be delighted to talk this through with you and clarify any points.

Want some support going Limited?

We know it’s a big decision to decide to trade through a Limited Company Structure so we will support you with this each step of the way with helpful advice.

We charge a one-off project fee starting from £300+VAT to support with Limited Company Set up and hand holding through the transitioning, which includes all of the following:

We have a call together to run through everything involved, share insights and you get plenty of time to ask all your questions on transitioning. We discuss the steps involved, implications and key decisions you’ll need to make (such as shareholding, timing and your obligations as a Director). This meeting is designed to ensure you go into the process feeling confident and well informed. We also agree the checklist of next steps, actions and timelines.

We then go about setting up the Limited Company on your behalf, which includes registration with Companies House and HMRC, enrolling for all relevant taxes and supporting you with other related activities. For example you will need to set up a Limited Company bank account, inform your insurance company and other relevant parties (if you are transitioning from soletrader structure)

We also provide you guidance on other updates that you will need to make such as changes to your website, T&Cs, invoices, contracts and correspondence with clients etc. to inform them of the change in business structure or simply set you up for success if this is the beginning of your business owner journey.

We will advise you on options for paying yourself as a Director of a Limited Company based on your specific circumstances.

If you are transitioning from a Soletrader business we will support you with   implementing the accounting to bring assets these into the Limited Company. Note there may be additional charges for this depending on the complexity of the assets.

Once you’re up and running we will usually then set you up with a suitable monthly retainer for Accounting/CFO services to support to guide you on your business journey.

The first step is to book in a chat with Harriet to explore if going LTD is right for you. We’ll get into some practical and honest guidance based on your situation and aspiration. This call is totally free and no obligation – just lots of helpful insights!

Hi there,  I’m Harriet Formby MA ACA, founder of Below The Line Finance: Chartered Accountants & Business Advisors, and your trusted Small Business CFO, Business Growth Specialist, and Finance Coach.

My mission is to financially empowering creative and purpose-driven entrepreneurs, founders and small business owners to build and grow aligned businesses  – with profit, purpose and healthy cashflows!  With my collaborative and supportive approach to finance, business strategy and accountancy, I am dedicated to guiding you to greater confidence and success with your venture.

Together we can say goodbye to numbers fear and confusion, build solid finance foundations and step into a supportive environment where you can turn your dreams into a reality through bespoke financial support.

What could you accomplish with your very own Mini CFO?