Chapter 12: Limited Company -- Is It Right for You?

Tax year notice: This guide uses 2025/26 tax year figures (6 April 2025 -- 5 April 2026). Check gov.uk for the latest rates.

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What a limited company actually is

As a sole trader, you and your business are the same legal entity. If the business owes money, you owe money. If someone sues the business, they're suing you personally.

A limited company is a separate legal entity. It has its own identity, its own bank account, its own tax obligations, and its own debts. You are a director (running it) and a shareholder (owning it), but the company is not you.

This separation creates two key benefits:

Limited liability: If the company goes into debt, your personal assets (house, car, savings) are protected. Creditors can only claim against the company's assets. There are exceptions -- directors can be held personally liable for fraud, wrongful trading, or personal guarantees on loans -- but the default position is protection.

Tax efficiency: A company pays Corporation Tax on its profits, then you take money out as a combination of salary and dividends. This can result in a lower overall tax bill than paying income tax and NI as a sole trader, especially at higher profit levels.

Sole trader vs limited company: The tax comparison

This is the calculation that drives most incorporation decisions. Let's compare both structures at different profit levels:

Worked example at 50,000 profit

As a sole trader:

• Income tax: (50,000 - 12,570) x 20% = 7,486
• Class 4 NI: (50,000 - 12,570) x 6% = 2,245.80
• Class 2 NI: 179.40
• Total tax: 9,911.20
• Take-home: 40,088.80

As a limited company (salary 12,570 + dividends):

• Corporation Tax on 50,000 profit: company pays salary of 12,570, so taxable profit is 37,430. Corporation Tax at 19%: 7,111.70
• Director's salary: 12,570 (no income tax -- within Personal Allowance, no employee NI below threshold)
• Employer NI on salary: approximately 1,723 (15% above 96/week threshold) -- this is an additional company cost
• Dividends from remaining profit: 37,430 - 7,111.70 = 30,318.30 available. After the 500 dividend allowance, tax on dividends at basic rate (8.75%): (30,318.30 - 500) x 8.75% = 2,609.10
• Total tax (company + personal): 11,443.80
• Take-home: approximately 40,279.20

At 50,000 profit, the difference is marginal. The real savings appear above 50,000, where sole trader income hits the 40% Higher Rate band but company profits stay at 19% Corporation Tax (or 25% above 250,000).

The crossover point

There's no single crossover point because it depends on how you take money out, dividend allowances, and whether you have other income. But as a general guide:

Profit level	Better option	Why
Under 30,000	Sole trader	Simpler, cheaper to run, tax difference is minimal
30,000 -- 50,000	Depends	Run the numbers for your specific situation
Above 50,000	Usually Ltd	Significant tax savings, especially above Higher Rate threshold
Above 100,000	Almost always Ltd	Avoid the 60% effective tax trap on the Personal Allowance taper

Key point: Tax savings are not the only factor. A limited company has ongoing costs (accountant, filing fees, admin) typically 1,000--2,000/year. If the tax saving is less than that, stay as a sole trader.

Corporation Tax

Unlike income tax bands for individuals, Corporation Tax has its own structure:

Profit	Rate
Under 50,000	19% (Small Profits Rate)
50,000 -- 250,000	26.5% effective (Marginal Relief applies)
Over 250,000	25% (Main Rate)

The marginal relief band between 50,000 and 250,000 creates an effective rate of 26.5% on profits in that range -- higher than both the small profits rate and the main rate. This is an oddity of the system.

For Sam and Steve at this stage, the 19% Small Profits Rate is what matters.

Jargon Buster: Corporation Tax The tax a limited company pays on its profits. It's the company's equivalent of income tax, but with different rates and rules. The company calculates and pays this directly -- it doesn't come off anyone's salary.

The salary + dividends strategy

As a director-shareholder, you don't just take a salary. You take a small salary (usually set at 12,570 or the NI threshold) and the rest as dividends from company profits.

Why? Because dividends are taxed at lower rates than salary:

Tax band	Salary rate (Income Tax + NI)	Dividend rate
Basic (up to 50,270)	20% + 8% = 28%	8.75%
Higher (50,271 -- 125,140)	40% + 2% = 42%	33.75%
Additional (125,140+)	45% + 2% = 47%	39.35%

There's also a dividend allowance of 500/year -- dividends up to this amount are tax-free.

The optimal salary level is a judgement call:

• 12,570 (Personal Allowance) -- maximises the tax-free amount. No income tax, but you'll pay some employer NI.
• The Primary Threshold (around 12,570 for 2025/26) -- avoids employee NI. Many accountants recommend setting salary at exactly this level.
• Higher salary -- if you want to maximise pension contributions or mortgage eligibility. Lenders often prefer salary income over dividends.

Warning: You can only pay dividends from retained profits. If the company doesn't have enough profit, you can't just pay yourself dividends. Taking money out beyond profits is a director's loan, which creates tax complications.

Setting up a limited company

Incorporating is straightforward and can be done in a day:

1. Choose a company name -- Check availability at Companies House (beta.companieshouse.gov.uk). The name must end with "Limited" or "Ltd".

2. Register at Companies House -- Apply online at gov.uk/limited-company-formation. Cost: 12 for standard (registered in 24 hours) or 30 for same-day.

3. Provide company details:

   • Registered office address (can be your home)
   • At least one director (you)
   • At least one shareholder (also you, typically)
   • SIC code (Standard Industrial Classification -- describes what the business does)
   • Share structure (most small companies start with 1 share at 1)
   • Memorandum and Articles of Association (standard templates provided)

4. Register for Corporation Tax -- HMRC usually contacts you automatically after Companies House registration, but you can register proactively. You must do this within 3 months of starting to trade.

5. Open a business bank account -- The company must have its own bank account. You cannot use your personal account.

6. Register for PAYE -- If you're paying yourself a salary, register as an employer with HMRC.

Ongoing obligations

A limited company has more paperwork than a sole trader:

Obligation	Deadline	Penalty for missing
Annual accounts filed with Companies House	9 months after financial year end	150 -- 1,500 (escalates)
Corporation Tax return (CT600) filed with HMRC	12 months after financial year end	100 immediate, escalates
Corporation Tax payment	9 months and 1 day after financial year end	Interest on late payment
Confirmation Statement to Companies House	Annual (on anniversary of incorporation)	Company can be struck off
Payroll (RTI submissions)	On or before each payday	Penalties per late filing
VAT returns (if registered)	Quarterly	Penalties per late return
Self Assessment (your personal return)	31 January (for salary + dividends)	Same penalties as Chapter 8

Most directors use an accountant to handle annual accounts and the CT600. Typical cost: 800--2,000/year depending on complexity.

Jargon Buster: Confirmation Statement An annual filing with Companies House confirming your company details are up to date (directors, shareholders, registered address, SIC codes). It's not financial -- just administrative. Costs 13 to file online.

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Real Scenario: Sam incorporates

Sam's Unbought business has grown to 95,000 turnover with 30,000 in expenses. Profit: 65,000. As a sole trader, Sam's tax bill would be:

Sole trader at 65,000 profit:

• Income tax: (50,270 - 12,570) x 20% + (65,000 - 50,270) x 40% = 7,540 + 5,892 = 13,432
• Class 4 NI: (50,270 - 12,570) x 6% + (65,000 - 50,270) x 2% = 2,262 + 294.60 = 2,556.60
• Class 2 NI: 179.40
• Total: 16,168
• Take-home: 48,832

As Sam's Vintage Ltd (salary 12,570 + dividends):

• Company: Salary cost 12,570 + employer NI ~1,723 = 14,293 deducted from profit. Taxable profit: 50,707. Corporation Tax at 19%: 9,634.33
• Sam personally: Salary 12,570 (no income tax, no employee NI at threshold). Dividends from remaining: 50,707 - 9,634.33 = 41,072.67. Dividend tax: (41,072.67 - 500) x 8.75% = 3,550.11
• Total tax (company + personal): 13,184.44
• Take-home: approximately 53,622.67 (salary + dividends)

Annual saving: approximately 2,984 -- minus accountant fees (say 1,200), Companies House fees (26), and extra admin time. Net benefit: roughly 1,700/year.

At 65,000 profit, incorporation makes sense for Sam. The saving will grow as the business grows.

Real Scenario: Steve's decision

Steve's gardening business has reached 52,000 turnover with 18,000 in expenses. Profit: 34,000.

At 34,000 profit, the Ltd tax saving versus sole trader is approximately 400--800/year. After accountant fees (1,000) and admin time, Steve would actually be worse off.

Steve stays as a sole trader for now. The decision changes when profit consistently exceeds 45,000--50,000. Steve revisits this calculation annually.

Key point: Incorporation is not a one-way door. You can transfer a sole trader business into a limited company relatively easily. But going back (from Ltd to sole trader) is more complex and has tax implications. Don't incorporate too early.

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Decision Tree: Should I incorporate?

• Is your annual profit consistently above 50,000? -- Strong case for Ltd. Run the numbers with an accountant.
• Is your profit 30,000--50,000? -- Marginal. The tax saving may not cover the extra costs. Review annually.
• Is your profit under 30,000? -- Stay sole trader. The admin and costs outweigh the benefit.
• Do you need liability protection? -- Ltd provides this regardless of profit level. Consider if you're in a high-risk industry.
• Are you planning to take on investors or sell the business? -- Ltd is almost always required for investment or acquisition.
• Do you want to retain profits in the business for growth? -- Ltd lets you keep profits in the company at 19% Corporation Tax instead of paying 20--45% income tax.

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Managing Deadlines in Blankitt

Running a limited company means juggling four key deadlines. Miss any of them and you'll face penalties, interest, or in the worst case, your company being struck off the register.

The four deadlines

Deadline	When it's due	What happens if you miss it
Confirmation Statement	Annual, on the anniversary of incorporation	Companies House can strike off your company
Annual Accounts	9 months after your financial year end	150 penalty, escalating to 1,500
CT600 (Corporation Tax return)	12 months after your financial year end	100 immediate penalty, escalates quarterly
CT Payment (Corporation Tax payment)	9 months and 1 day after your financial year end	Interest on the outstanding amount from day one

How Blankitt calculates them

You enter two dates when you set up your company in Blankitt: your financial year end and your incorporation date. From those two dates, every deadline is calculated automatically.

If your financial year ends on 31 March 2026:

• Annual Accounts due: 31 December 2026
• CT600 due: 31 March 2027
• CT Payment due: 1 January 2027

The Confirmation Statement runs on a separate cycle based on your incorporation date. Blankitt tracks both cycles independently.

Dashboard alerts

Deadlines appear on your dashboard with colour-coded urgency:

• Green -- more than 30 days away. On track.
• Amber -- 30 days or fewer. Time to start preparing.
• Red -- 14 days or fewer. Act now.

The alerts are hard to miss. They sit at the top of your dashboard and stay there until the deadline is filed or passed.

Marking deadlines as filed

Once you've submitted your accounts, filed your CT600, or made your Corporation Tax payment, mark the deadline as filed in Blankitt. The status updates, the alert clears, and the next deadline in the cycle is calculated automatically.

Keep a record of confirmation numbers and submission dates. If HMRC or Companies House queries a filing, you'll have the evidence ready.

CT600 report

Go to Reports -- CT600 to see your Corporation Tax calculation. This report pulls your income, allowable expenses, capital allowances, and any other adjustments to produce your taxable profit and the Corporation Tax due.

It's not a replacement for your accountant's review -- but it gives you a real-time estimate of what you'll owe. No surprises when the accountant sends their bill.

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Checklist: Incorporating your business

• Run the tax comparison for your specific profit level (or ask an accountant)
• Choose a company name and check availability at Companies House
• Register at gov.uk/limited-company-formation (12 standard, 30 same-day)
• Receive your Certificate of Incorporation and company number
• Register for Corporation Tax with HMRC (within 3 months of trading)
• Open a business bank account in the company name
• Register as an employer (PAYE) if paying yourself a salary
• Set up payroll (or ask your accountant to handle it)
• Transfer business assets and contracts to the new company
• Inform HMRC that you've ceased trading as a sole trader
• Find an accountant experienced with small limited companies

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Jargon Buster

Term	Plain English
Limited company	A business that's a separate legal entity from its owner(s), providing limited liability
Director	The person who runs the company. Has legal duties including filing accounts and acting in the company's best interest
Shareholder	The person who owns the company (via shares). Receives dividends from profits
Dividends	Payments from company profits to shareholders. Taxed at lower rates than salary
Corporation Tax	Tax on a company's profits (19% for small profits, 25% for profits over 250,000)
Companies House	The government registry where all UK companies must register and file annual accounts
Registered office	The official address of the company, recorded at Companies House. Can be your home
SIC code	Standard Industrial Classification code -- a number describing what your business does
CT600	The Corporation Tax return form filed with HMRC
Confirmation Statement	Annual filing with Companies House confirming your company details are correct
Retained profits	Profits kept in the company rather than paid out as dividends. Taxed at Corporation Tax rates
Director's loan	Money taken from the company beyond salary and dividends. Creates tax liabilities if not repaid