It may be possible to save tax by running a business through a company. It depends on the combination of many different factors. 

Subscribers see Sole trader v. limited company: Tax differences & savings  2023/24

This is a freeview 'At a glance' guide to saving tax through incorporation.

  • At the most basic level, a sole trader or partner will, if they are profitable, pay Class 4 National Insurance Contributions (NICs).
  • If profits are high enough a sole trader will pay Income Tax at higher rates.
  • A company is not subject to NICs on its income.
  • The Corporation Tax rates used to calculate the tax due on acompany's profits now depend on the level of profits.
    • From 1 April 2023, there is a Small Profits Rate of 19% and a Main Rate of 25%.
  • A company owner will not be subject to NICs if company profits are extracted out via dividend. Dividends are taxed at lower rates compared to earnings and so in a straightforward case, depending on the level of profits, there may be some tax savings by extracting profits by dividends compared to continuing as a sole trader or partner.
  • Increases to dividend tax rates and a reduction in the dividend allowance will also have an impact on any tax saving.
  • When there are taxable benefits involved the situation may reverse itself. For example, a sole trader may claim tax relief on the cost of running a motor car if used for business purposes, a company owner will be taxed on a car benefit charge if they have the use of a company car.

For more examples of the differences see Sole trader v. limited company: key tax & legal differences and for illustrative tax workings see Sole trader v. limited company: Tax differences & savings  2023/24


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