Unlocking Tax Benefits: Setting Up Your Own Company

Discover the potential tax savings and responsibilities when establishing your own limited company.


Running your own limited company can be a smart financial move, offering significant tax advantages compared to being a sole trader. However, with these benefits come additional responsibilities. This article will guide you through the process of setting up a limited company and explore the exact amount of tax savings you could enjoy.

Sole Trader vs. Limited Company: Understanding the Differences

In the United Kingdom, approximately 4.3 million self-employed individuals operate either as sole traders or limited companies. The key distinction lies in liability. Sole traders are personally responsible for all business debts and obligations, potentially putting personal assets at risk. In contrast, limited companies limit shareholders’ liability to their invested capital.

Setting Up as a Sole Trader

To establish yourself as a sole trader, minimal steps are required. You’ll need to register with HM Revenue and Customs if you haven’t previously filed self-assessment tax returns. This involves creating a Government Gateway account, simplifying tax return filing and payment processes.

Setting Up a Limited Company

Setting up a limited company involves more paperwork. You’ll start by completing and submitting an incorporation form to Companies House, specifying company details, registered office address, and initial directors and shareholders. This process incurs a £12 fee, which can be paid directly through the Companies House website or with the assistance of an accountant.

Additionally, having a dedicated business bank account to segregate personal and company finances is essential. Many banks offer specialized services for limited companies, so compare features and fees to choose the right one for your business.

Utilizing accounting and bookkeeping software such as Xero, QuickBooks, or FreshBooks can help manage year-end compliance tasks, annual accounts, and corporation tax returns efficiently.

Tax Implications: Sole Trader vs. Limited Company

Taxation differs significantly between sole traders and limited companies. Sole traders are taxed on their individual earnings, with rates ranging from 20% to 45%. Deducting work-related expenses can reduce the taxable amount. Additionally, they must pay Class 2 and Class 4 National Insurance contributions.

Limited companies, on the other hand, pay corporation tax on profits, with rates varying based on profit levels. Directors have control over their salaries and can withdraw dividends, subject to different tax rates. A £2,000 dividend allowance offers tax-free withdrawal options.

Directors can also optimize tax savings by expensing certain items, reducing their corporation tax liability.

Calculating the Savings

A comparison between a sole trader and a company director earning £30,000 reveals potential tax savings. A company director can structure their income to minimize taxes, potentially leaving them with more take-home pay.

However, the decision to operate as a sole trader or a limited company should consider various factors, including business nature, liabilities, long-term goals, and personal preferences. Consulting legal and financial professionals is advisable.


Setting up a limited company can provide substantial tax advantages, but it also entails additional responsibilities. Understanding the differences and weighing the costs and benefits is crucial when making this important decision.

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