February 10, 2014

Should I be self-employed or a limited company?

startup should I be self employed or a limited

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


[email protected]


  • Fred says:

    Am I right assuming that if I want to employ somebody then I must have a Limited ? Is it still possible with self employed ?

    • Chloe Johns says:

      Hi Fred.

      You don’t have to be a limited company to hire someone – you can do so even if you are self-employed.


  • Marty Rogers says:

    Finally, a clear post about which direction to go!

    I was unsure of the benefits in relation to revenue and profits – it’s certainly hard to get a clear cut answer on the HMRC website, and I struggled for the answer until I found IH.

    Cheers gang!

  • Confused says:

    Can a newly formed company in 2014 claim Self Employed previous annual loss of 2013-2014? Many Thanks

    • Chloe Johns says:

      Hi there, self-employment income and company income come from two different entities, an individual and a company. Losses from one can not be offset against the other.

    • Chloe Johns says:

      Yes, a self employed person can work for someone overseas, but the income is taxable as part of their trade of self employment. Occasionally you might have an issue in that unless you are VAT registered, some overseas companies wont deal with you because it is difficult to prove you are a genuine business. Also, depending on what you do, if you aren’t VAT registered in the UK, you may end up with VAT issues in the country of residence of the company you contract/sell to if they are based in Europe.

  • Josh says:

    Hi, just one thing; you said above that if you start earning over £79k then you need to be VAT registered, is it £79k turnover or profit? I think it’s the turnover

  • Hema Davay says:

    Hi there
    I find this post very interesting. I am a Finance Consultant and thinking of best way doing business going forward so thanks for all the information.

  • Bee says:

    Hi, If you are employed and already in the 40% bracket, do you think that it is better to be limited or self employed for other income earned (under £7000) outside employment?

  • Alex says:

    Hey there. There is an answer i am looking for, wich one offers more benefits as tax return? Ltd or self employed?

  • Martin Adams says:

    Great posts here, but can you tell me if it’s best to hang on until 1st Feb 2016 before registering as self-employed? I am just getting ready to launch the business but as yet not traded with any customers. If I register before 31st Jan 2016 will that mean an early self-assessment return covering one month?

  • brandon f says:

    hi I want to start locum as a radiographer and was told i would be better off as a limited company compared to PAYE. does that mean self employed is out of the question and I should jump straight to companies house?. please help. I have been self employed before with a UTR number but that was for some other job as a sub contractor. SO i gues im asking if yes, i can be self employed do I get my old number back.

  • Romina Melis says:

    Thanks a lor for all clear and useful information.

    In terms of tax return is better to be registered as a limited company then?
    And when you move to ltd company you just switch off/pause the self employment position?
    Can you change name of your ltd company if for example you give it your name at the beginning and then it becomes a bigger business with employees and a proper site?

    Thanks in advance

  • Victor C says:

    Excellent article, but can you clarify one point, you said: “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”

    I think limited company needs to pay corporation tax, and when I take dividend, I need to pay income tax, so by paying tax twice, why would it bring tax savings? Thanks.

  • Aly says:

    I’m in the process of setting up a business and will be registering for self employment as a sole trader. What I’m wondering is if I’m also employed will the fact that I already have a personal allowance mean that all of the self employed earnings are taxable?

  • Bernardo da Silva says:

    Very insightful article. I have been researching information about the differences between a Ltd company and a sole trader.
    Basically, I’m working 7 days a week right now. I work a weekend part time job at a retail store and during the week I am working for another company. I plan on quitting my week day job and starting my own company new week working as a consultant. I still want to keep my weekend job but not sure if I have to register as a sole trader or a limited company. Also there’s different types of limited companies. please advise.

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