At a glance

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

  • At the most basic level, a sole trader will, if they are profitable pay both Class 2 and Class 4 National Insurance contributions (NICs). If profits are high enough a sole trader will pay tax at higher rates.
  • A company is not subject to NICs or higher rate tax. A company owner will not be subject to NICs if company profits are extracted out via dividend. Dividends are taxed at a lower rate compared to earnings and so in a straightforward case, there may be some tax-saving by extracting profits by dividends. 
  • When there are taxable benefits involved the situation may reverse itself. A sole trader may claim tax relief on the cost of running a motor car if used for business, a company owner will be taxed on a car benefit charge if he has 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 Will I save more tax if I trade through a company?

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