As a business owner, one of the most important decisions you will make is choosing the right structure for your business. In 2025, many entrepreneurs are considering whether registering as a Limited Company is the best option. In this blog post, we’ll explore the benefits and considerations of registering as a Limited Company, so you can make an informed decision for your business.
If you need any advice and you’d like to talk to a real person, get in touch with us at Clayton Stirling & Co, we are based in the UK, Kent.
What is a Limited Company?
A Limited Company is a type of business structure where the company is a separate legal entity from its owners (shareholders). This means the company has its own legal rights, can own property, and is responsible for its own debts. There are two types of Limited Companies in the UK:
- Private Limited Company (Ltd): The most common form of Limited Company, where shares are privately owned.
- Public Limited Company (PLC): A company that can sell shares to the public, typically larger companies.
Rapid Formations has a great blog post on what a limited company is here, they go into detail about each area.
An example of how turning your business into a limited company could finacially benefit you
Scenario:
- Annual Profit: £50,000
- Director/Owner Salary: £30,000
- Dividends Taken: £20,000
1. Sole Trader
As a sole trader, your income is taxed as personal income, and you will pay Income Tax and National Insurance Contributions (NICs) based on your total profit.
- Income Tax (2024/2025 rates):
- Personal Allowance: £12,570 (tax-free)
- Basic Rate (20%): On income between £12,570 and £50,000
Tax Calculation:
- Taxable income: £50,000 – £12,570 = £37,430
- Income Tax: 20% of £37,430 = £7,486
- National Insurance Contributions (Class 2 and Class 4 NICs):
- Class 2 NICs: £3.45 per week = £179.40 annually
- Class 4 NICs: 9% on profits between £12,570 and £50,270 = 9% of £37,430 = £3,368.70
Total Taxes for Sole Trader:
- Income Tax: £7,486
- NICs: £179.40 (Class 2) + £3,368.70 (Class 4) = £3,548.10
Total Tax Liability: £7,486 + £3,548.10 = £11,034.10
2. Limited Company
As a Limited Company, the company itself pays Corporation Tax on profits, and you can choose to pay yourself through a combination of salary and dividends. Dividends are taxed at a lower rate than salary.
- Corporation Tax (2024/2025 rate): 25% on profits above £50,000
Step 1: Corporation Tax Calculation
- Profit: £50,000
- Corporation Tax: 25% of £50,000 = £12,500
- Post-tax profit: £50,000 – £12,500 = £37,500
Step 2: Salary and Dividends
- Salary: £30,000 (salary is tax-deductible for the company, so no extra tax on this)
- Dividends: £20,000 (the remaining post-tax profit)
Step 3: Dividend Taxation
- Dividend Allowance: £1,000 (tax-free)
- Tax on Dividends: The first £1,000 is tax-free, and the rest is taxed at the dividend tax rates:
- Basic Rate (8.75%) on income up to £50,270
- Dividend Tax on £19,000 (after the £1,000 allowance) = 8.75% of £19,000 = £1,662.50
Step 4: National Insurance
- Employee NICs: On salary of £30,000, you’ll pay 12% on income between £12,570 and £50,270:
- NICs: 12% of (£30,000 – £12,570) = 12% of £17,430 = £2,091.60
- Employer NICs: The company also pays Employer NICs at 13.8% on salary over £9,100:
- Employer NICs: 13.8% of (£30,000 – £9,100) = 13.8% of £20,900 = £2,886.20
Step 5: Total Taxes for Limited Company
- Corporation Tax: £12,500
- Dividend Tax: £1,662.50
- Employee NICs: £2,091.60
- Employer NICs: £2,886.20
Total Tax Liability:
- Corporation Tax: £12,500
- Dividend Tax: £1,662.50
- Employee NICs: £2,091.60
- Employer NICs: £2,886.20
- Total Tax Liability: £19,140.50
Comparison:
- Sole Trader Tax Liability: £11,034.10
- Limited Company Tax Liability: £19,140.50
Difference in Tax Liability:
In this example, the sole trader pays £8,106.40 less in taxes compared to the Limited Company. This is mainly due to the more favourable tax treatment of salary and dividends under the Limited Company structure, even though the company itself is paying Corporation Tax.
Key Takeaway:
In many cases, a Limited Company can still be more tax-efficient, especially if profits are reinvested or if you’re able to take advantage of dividends rather than salary. However, the administrative costs and legal obligations of running a Limited Company (e.g., Corporation Tax, NICs, bookkeeping, etc.) need to be factored in.
It’s essential to consider your specific business situation. For tailored advice, Clayton Stirling & Co can help you navigate the decision and determine the most tax-efficient structure for your business in 2025.
Key Benefits of Registering as a Limited Company
- Limited Liability Protection
One of the biggest advantages of operating as a Limited Company is limited liability. This means your personal assets are protected from business debts and legal action. If your company faces financial difficulties, only the company’s assets are at risk, not your personal ones. - Tax Efficiency
Limited Companies can often be more tax-efficient than sole traders or partnerships. Companies are subject to Corporation Tax, which may be lower than the higher rates of income tax that sole traders or partners pay. Additionally, company directors can take advantage of tax planning strategies, such as paying themselves a salary and dividends to reduce overall tax liability. - Professional Image and Credibility
Registering as a Limited Company can enhance your business’s credibility. Clients and suppliers may feel more comfortable working with a Limited Company due to the formal structure and legal protections in place. This can be particularly important if you are looking to expand or work with larger clients. - Access to Funding and Investment
If you plan to raise capital or seek investment in the future, operating as a Limited Company can make it easier. Investors and banks tend to prefer dealing with companies that are structured as Limited Companies due to the legal protections and the ability to issue shares. - Potential for Growth
Limited Companies are more likely to scale effectively. With the flexibility to issue shares, they have better options for attracting external investment, allowing for faster growth and expansion. Plus, they are able to employ staff and hire directors, which provides greater operational flexibility.
Considerations Before Registering as a Limited Company
- Administrative Responsibility
Operating as a Limited Company comes with more administrative duties than being a sole trader or partnership. Companies are required to file annual accounts, submit confirmation statements, and comply with regulations from Companies House. Depending on your business, this can be time-consuming or may require professional help to ensure compliance. - Initial Setup Costs
While registering a Limited Company is relatively inexpensive, there are associated costs with setting up and maintaining the company. These might include accountancy fees, legal fees, and the costs for filing annual returns and financial statements. - Income Tax vs Corporation Tax
Limited Companies pay Corporation Tax on their profits, and the directors can draw a salary and/or dividends. However, you will need to ensure that your income levels justify the additional administration involved in running a Limited Company, as this may not be as beneficial for smaller businesses. - Shareholder Responsibilities
As a director of a Limited Company, you are responsible for ensuring the company meets its obligations to shareholders, employees, and the government. This includes paying tax and national insurance, ensuring the company complies with health and safety regulations, and preparing financial statements.
When Should You Register as a Limited Company?
You may want to consider registering as a Limited Company in 2025 if:
- Your business is growing and you need more capital.
- You want to protect your personal assets from business liabilities.
- You are looking to hire employees or take on business partners.
- You want to increase your business’s professional image and credibility.
If your business is small and primarily self-employed, registering as a Limited Company may not provide significant benefits. However, as your business expands or your earnings increase, the benefits of a Limited Company structure may become more apparent.
How Can Clayton Stirling & Co Help?
At Clayton Stirling & Co, we offer expert advice on setting up a Limited Company, managing your finances, and ensuring tax efficiency. Our team can guide you through the registration process, help you with your annual accounts, and provide ongoing support for your business. Whether you’re a start-up or an established business, we can help you make the right decisions for your future.
Conclusion
In 2025, registering as a Limited Company can offer numerous benefits, from limited liability protection to tax efficiencies and access to funding. However, it’s important to consider the administrative duties and associated costs before making the leap. If you’re unsure whether this structure is right for your business, consult with professionals like Clayton Stirling & Co for tailored advice and support.
