Q. When do I have to become a limited company?

Some freelancers who are sole-traders believe there’s a ‘threshold’ at which they need to become a limited company, but this isn’t the case.

There’s no legal limit on how much you can earn as a sole trader, but there might be some tax benefits to becoming a limited company, once you’ve exceeded £50,000 in income.

Deciding whether to operate as a sole trader or a limited company depends on several factors, and you should explore the pros and cons of both approaches.

But many freelancers start considering incorporating a limited company when:

Profits exceed £50,000 per year

As a sole trader, you pay Income Tax and National Insurance on your profits.

Once you exceed £50,000 in income, you’ll start to pay higher rates of income tax.

As a limited company director, you can have a lower salary, and supplement your income through dividend - which may be taxed lower than higher rate income tax.

Liability protection becomes crucial

Operating as a limited company means your personal finances are separated from your business finances. This can protect your personal finances if your business runs into difficulties or you face legal challenges.

You want to improve credibility

Some clients may prefer working with limited companies, as there can be a perceptiont they are more ‘professional’.

Although many industries avoid working with single-person limited companies too, due to issues around IR35.

You want to reinvest profits

Retaining profits in the company instead of withdrawing everything as personal income can help you plan for growth, and reduce your tax liability over a period of time.

Remember

It’s always worth exploring your options with a financial advisor or accountant, to understand the best approach for your own circumstances.