Starting up:
Tax implications
If you operate as a sole trader or are a partner in a partnership or limited liability partnership, you will be taxed as a self employed person. Your profits should be included on the self employment pages of your self assessment return.
You will need to pay income tax on the profits of the business, or your share of those profits, as well as Class 2 and Class 4 national insurance contributions. You are taxed on the profit regardless of whether you have drawn that profit out of the business or not.
Partnerships and limited liability partnerships also need to make a partnership return to HM Revenue & Customs (HMRC).
Companies pay corporation tax on their profits and must make an annual self assessment return to HMRC.
Company directors are employees of the company. The company must pay employer's Class 1 NIC and the directors must pay income tax and employee's NIC on any salary. These costs are allowable deductions in calculating the profits of a company.
Profits after tax can be distributed to shareholders as dividends. Corporate shareholders do not pay tax on dividends received but individual shareholders are taxed on dividends received.
Whether you would pay less tax as a company or as a sole trader will depend on your profit level and whether you take money out of a company as salary or dividend. Any tax saving would need to be balanced against the costs of incorporation and running a company.
 |  | Related literature: |
- An introduction to self assessment
- An introduction to the tax system for self employed
- Corporation tax self assessment
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Where next?
Within Your business structure...Within Starting up ...
- Developing your business idea
- Setting up
- Accounting systems
- Payroll and PAYE
- National Insurance contributions
- VAT
- Income tax
- Corporation tax
- Contact us about this issue
- Read about how we can help you & your family
- Request a meeting with us
