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Company formation, sole trader

Sole trader
Partnership
Limited Company
LLP

Sole trader or “Self-employed”

A sole trader must register at the tax authority within three months of starting the business. If this does not happen within this time period, it attracts a fine of £100.

Sole traders have two types of tax liability:

National insurance:

     

    • £2.95/week, which needs to be paid with each tax return 
    • And at the end of the tax year when completing the annual tax return, an additional 9% profit (the difference between total income and the total expenses) must be paid in, if the profit exceeds £8,164.  

     

Income tax:

     

    • Has to be paid once a year.
    • Deadline to pay this: the following year of the tax year on the 31 January. (For example, the end of the 2017/2018 tax year is the 5 April 2018. Therefore, the deadline to pay in the amount is the 31 January 2019.) 

     

The amount of income tax is calculated by the following:

 

 

Income Tax Liability
 £0   -   £ 11850  Tax free
£ 11851  -   £ 34500  20%
£ 34501  -   £ 150.000  40%
£ 150.001 -  more  45%

 

 

At the same time of the payment above, for the current year, there must be a payment on account for the next tax year if the tax is above £1,000. 
 
Payment on account is 50% of the previous tax year you’ve already paid. (Sticking to the previous example: the amount of tax paid on 31 January 2019 = the calculated tax for the 2017/2018 tax year + 50% of the calculated tax for the 2017/2018 tax year.)
 
The other 50% of the payment on account for the current year must be paid by 31 June. (For the above said example, the 2018/2019 – current – tax year payment on account’s other half must be paid by 31 June.) 

Sole trader responsibility:   If you are self-employed you are (personally) liable for all liabilities of the business.

Our advice: open a business account and find yourself a good bookkeeping service that understands your business and will keep you within the tax rules and ensure you meet your tax obligations. HMRC will not accept “I didn’t know” as an excuse for any mistakes, delays or omissions. It pays to get good advice so that you can focus on running your business.

Partnership

Two or more self – employed making up one shared enterprise, while still maintaining their self-employed status. Often formed where each partner has specific skills to bring to the venture. 

Partnerships are required to register at the tax authority within three months after they start their businesses. If this does not happen within the time limit, a fine of £100 can be expected. 

Tax liability

Income  

 

 

     

    • Has to be paid once a year, after the company’s profit. Deadline: the following year of the tax year on 31 January. (For example, the end of the 2017/2018 tax year is the 5 April 2018. Therefore, the deadline to pay in the amount is the 31 January 2019.)
    • After money withdrawal from the partnership, the self-employed pays taxes. (This counts as income and happens in the above said ways.) 

     

The amount of income tax is calculated by the following:

 

 

Income the amount of tax
 £ 0   -   £ 11850  Tax free
£ 11851  -   £ 34500  20%
£ 34501  -   £ 150.000  40%
£ 150.001 -   more  45%

 

 

At the same time of the payment above, for the current year, there must be a payment on account for the next tax year if the tax is above £1000. 
 
Payment on account is 50% of the previous tax year you’ve already paid. (Sticking to the previous example: the amount of tax paid on 31 January 2019 = the calculated tax for the 2017/2018 tax year + 50% of the calculated tax for the 2017/2018 tax year.)
 
The other 50% of the payment on account for the current year must be paid by 31 June. (For the above said example, the 2018/2019 – current – tax year payment on account’s other half must be paid by 31 June.)  

The partnership’s responsibility: partners are (personally) liable for all liabilities of the business. i.e. each partner is personally liable for the liabilities of the whole partnership and liability extends to their personal assets, not just the assets of the business.

Opening a business account is obligatory but we would also recommend that you find a professional bookkeeping service that understands your business and will keep you within the tax rules and ensure you meet your tax obligations. HMRC will not accept “I didn’t know” as an excuse for any mistakes, delays or omissions. It pays to get good advice so that you can focus on running your business.

Limited Company

A Limited company is created by completing the registration requirements with Company’s House. A director needs to be nominated for the company; there is no minimal capital for the incorporation of a company and a company can be formed with just one person.

Tax liability

Income tax:

     

    •  Corporation tax is 19% of the company’s profit. The deadline for payment is the 9th month after the end of the company’s accounting period.
    • Dividends can be paid from net profit but they are also taxable  

     

Tax liability on dividends

 

 

  Tax liability
 0   -   £ 2000  0%
£ 2001  -   £ 34500  7,5%
£ 34501  -   £ 150.000  32,5%
£ 150.001   and more  38,1%

 

 

The financial responsibility for a limited company: the business is responsible for liabilities only to the extent of the capital invested in the business.

Opening a business account is obligatory. The tax rules become more complicated when you are a limited company and we strongly advise you enlist the services of a good bookkeeping practice who can offer both practical bookkeeping and financial guidance to keep your company meeting its tax obligations. The penalties can be quite severe for errors and omissions.

Limited Liability Partnership (LLP)

A LLP combines the flexibility of a limited company and the tax position of a partnership with the benefits that limited liability gives. The LLP is a body corporate, which is separated from the partners who have incorporated the LLP. The members, i.e. the partners are taxable in the country they are resident in.

Advantages of LLP

     

    • The LLP is a body corporate whose partners have limited liability i.e. does not extend to their personal assets.
    • Any legal or private person can be a part of an LLP.  

     

The LLP must start trading activities within one year of the incorporation.

Members

An LLP must have at least two members, with the same legal responsibilities for the partner. The profits are split in proportion to the share contribution of each partner. The details of the partners are publicly available unless there is a Nominee service in place.

The LLP needs a minimum of two Nominee members (which is equivalent to the role of executive director and company secretary in a limited company) who have the same rights and responsibilities as any other members in the LLP.  

However, these assigned members are also responsible for the following:

     

    • Signing of documents
    • Changes in the members of the business and registration of any changes
    • Filing the annual accounts with Companies House
    • Acting for and behalf of the business, annual returns on behalf of the LLP, signing invoices 

     

Membership agreement

Every member of the LLP has to sign a membership agreement. This is the main document of the business and it must contain the following data:

An LLP must submit its annual return and annual accounts to Companies House the same way as a limited liability company.