It’s one of the big choices everyone who sets up a small business needs to make: self-employment or life as a limited company? Here’s what you need to consider if you’re contemplating launching a startup…

Start simple: go self-employed

When you’re starting out, registering as self-employed is the easiest option. It means you can focus on getting your business up and running without needing to worry about company law, filing annual accounts or paying corporation tax.

 

You simply need to make sure you file your self-assessment tax return by 31 January each year. To get things started, you need to register for self-assessment within three months of starting your business.

 

There are a lot of tools out there that take the hassle out of filing your tax return, even if you’ve never done it before. Try gosimpletax.com.

 

And make sure you keep all of your records safe too: invoices, receipts, expenses, everything. It’s easy to lose track when you’re focused on building your business, but you’ll need these records when you complete your tax return.

 

Set aside time at least every week to get everything together, and think about using a site like xero.com/uk to track everything you’re spending.

 

Understanding the tax year

 

The tax year is the twelve months up to March each year (technically the tax year actually ends on 5 April, but for your accounting purposes, 31 March is fine).

 

So, for instance, if you registered as self-employed in Feb 2014, your first tax return would cover the period up to 31 March 2014. You would then need to file a tax return for this period by 31 Jan 2015. As you’re working for yourself, there are no company taxes involved – you will only get taxed on your profits for the period from starting to 31 March 2014. These are declared via the self-assessment.

 

And that’s about all you need to know until you start earning more than £83,000 (since April 2016) in a 12-month period. If and when that happens, it’s time to register for VAT, but that’s a whole other kettle of fish, and one we’ll come back to in a future blog.

 

Moving on: becoming a limited company

 

Once you’ve got a good couple of years under your belt – and if you’re planning to keep your business going for at least another 12 months – it might make sense for you to set up as a limited company. We usually wouldn’t recommend this unless you’re turning over a decent amount of cash too – at least £30,000 per year is a good guide.

 

Setting up as a Ltd company does add an extra admin burden. You need to appoint directors, register with Companies House and complete company accounts as well as your annual return. Corporation Tax also becomes something you can no longer ignore.

 

But it can also bring tax savings, as you are able to take a dividend instead of simply taking a slice of company income home, as you would have done in self-employment.

 

And it might even change the way clients look at you. Is there an advantage to being able to introduce yourself as a director? Does it help people take you a little more seriously? It just might, but only you can decide when you’re ready to take that step.

 

When that day comes, it’s time to head to Companies House

 

If you have more questions about setting up in business, or have suggestions for a future blog topic, email us at

 

talk@ihorizon.co.uk