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I am considering a work sideline alongside my regular job. It will not be a large amount of money but enough to raise the question of whether it is better to go sole trader and use self-assessment etc and be taxed at 41%, or to set up a company with just me in it and thereby have the finances work differently.

Expenses are low and I can easily keep track of them all.

I have many more questions about this but there is no rush to decide so am open to all wisdom of you all; can anyone offer their advice or experience here?

Thanks for stopping by to read this.

Principal reason for going limited company is that it protects your house and other assets, should whatever you do, go pear shaped to the extent that someone sues you. 

Where did you get the 41% tax rate from? - As a sole trader you will be on the normal brackets (obviously if this pushes you over the 50K band then that would be at 40%).

There are quite a few more hoops to jump through if becoming ltd company - including more regular reporting.

Guessing from Nick's username

Scottish Income Tax 2022/23
Taxable income    Band    Tax rate
Over £12,571 to £14,732    Starter rate    19%
Over £14,733 to £25,688    Scottish basic rate    20%
Over £25,689 to £43,662    Intermediate rate    21%
Over £43,663 to £150,000    Higher rate    41%

Random questions to ask yourself that might help you pick a direction:

• Is this a toe-in-the-water to see if you can change careers?  That's a nudge towards a limited company as building a single trading history for this enterprise may help should you go looking for loans or credit from suppliers down the line, or should you wish to expand the business substantially in the future.
• What is your liability like under this enterprise?  
  • A limited liability company parks much of the liability with the company so long as your operations are legit.  
  • Either way, do you need insurance?  How do those costs differ sole-trader to limited company?
• Admin burden...
  • The sole trader component of self-assessment is trivial.  
  • You're going to need to do (or pay for) basic book keeping for a limited company even if small in scope, and the mandatory reporting burden is higher for a company - failure to submit various returns as a director has potentially serious consequences both for the business assets (seizable by the Crown) and for the director (criminal charges are possible if perhaps unlikely)  so you do need to be on top of the admin.  Look at the companies house returns for similar small businesses to give you an example of what they file.

Hi

Scottish resident, some of my salary is taxed at 41%.

Correct

Thank you.

Liability is low, very low and it would be covered by the organisation who would pay me. Of course I would though also have my own insurance.

I did this for a while (now full time self-employed).  Limited company gives you a lot more flexibility in terms of how to get paid (pension vs. salary vs. dividends) and hence to minimise tax bills.  Also as others pointed out, if someone sues, it's the company not you, which is a big plus in my view.

It is very easy to set up a company and also to run it. I have yet to need an accountant for example, although if you are planning lots of transactions, that might make things trickier.  DM if you want.

I've always gone the Ltd company route. It's clear then what expenses and revenue are company, and what are personal; all filing nowadays is online and very simple, and it's a lot more flexible in terms of taken income, taking on partners and staff etc 

The one thing that isn't much cop is the limited liability! You won't find anyone prepared to advance finance that isn't backed by a personal guarantee, and there's any number of liabilities - 3rd party for instance - which ultimately remain the personal liability of the directors.

A pessimist might also want to bear in mind how the different frameworks have worked out for people in terms of government support through the pandemic, in case such a thing ever happens again...

Particularly for a new company with no assets. Makes sense really, why would a bank want to loan a company a load of money with nothing to secure the loan against? It'd be super risky.

It's ok, my job is pandemicproof!

I do not need a loan and it makes no difference that this venture will be assetless.

Having done both

VAT is the main headache – making Tax digital means that you have to submit electronically regardless of size. If you are doing this, then company micro accounts are not going to be hard. You will, in England, pay slightly less tax.

Getting a company credit card, after having a ST one for years without problems was the biggest pain for me.

Now I have a partner and employees being a limited company is natural.

When I was by myself it saved me a lot of tax when a couple of my creditors delayed payment due to complete chaos on their part pushing considerable income into the same year. If sole trader, having separate bank accounts is essential. Some banks don't like you doing sole trader on domestic accounts and get quite cross and close accounts.

It costs more in accountancy being ltd £1000-£1500. Self employed you can do it yourself or pay someone £150. So that could sway things depending on how much you plan on earning. 

Insurance may be more for LTD aswell

I recently started a limited company but I can't comment on the sole trader angle as I've never done that.

If you are a limited company with less than £85k turnover then your principle paperwork/electronic work burden is:

1) Trivial 1 page stuff like company confirmation statement each year, dividend payment, director's loan contract... All stuff that takes up time but is ultimately fairly straightforward and you can just download proforma pages for them from online. Don't underestimate how much time you will waste reading and learning about all of it though.

2) Corporate tax return. You can do this yourself but it will take time and unless you actually are an accountant, you will never get the sort of tax efficiency that you could get by paying an accountant to do it (c. £1000 to £1500 per year). Whether it is worthwhile to pay an accountant depends on the size of your company revenue, profit, etc.

3) All the bullshi* like needing to pay money to the information commisar (I forget the name) because you are keeping peoples details, needing to fill out a business rates form for any location you work from, you'll probably be exempt from business rates as you are too small but it needs to be done. Getting separate business insurance. Getting separate business bank account (I recommend Starling as they don't charge fees for every withdrawal and deposit like a lot of banks do). Having a register of people with significant control in the company (another 1 page exercise)... There are almost certainly a few more I forgot here, and every one is just a little bit more wasted time

4) PAYE. If it's a side hussle and you have a proper job otherwise then you probably don't want to register for PAYE and just take money out as dividends but if you do switch to full-time with your company then you'll need to set this up yourself and administer it or get an accountant to do it for you (£300-£500 per year).

5) If you do go over £85k revenue (NOT profit) then you get into the world of VAT registration. I am avoiding this but if you do go there then you can say hello to essentially filing a VAT return every 3 months and paying and claiming VAT and god knows how much more in accountant fees.

The ability to offload some personal expenses directly onto the company and save taxes is pretty great. As a director any new mobile phone and your mobile phone bills can all be paid by the company and there are a whole world of other little things like that that do add up to a nice saving when you consider they are deducted as expenses rather than being taxed with NI and income tax and so on as they would if you paid for them personally.

If it looks like you were about to go into a higher bracket one year, you can leave money in the limited company for a year or two until you are perhaps earning less from other sources and can then take it out of the company at a more favourable tax rate.

Making a new company costs £13 and, like, 2 pages of paperwork or something so I'd say it's worth doing because if you have any aspirations at all to grow the company then you're better off having it all as a limited company to begin with rather than trying to transition further down the line.

Obviously as others said, protecting your own assets is a _very_ important factor. A limited company certainly makes them safER but not totally safe, someone _can_ still sue you/go after you as the company director, it's just a lot harder. Obviously you'll want a company insurance policy as others have said.

A cynical pessimist might question whether the government wouldn't just go ahead and do the support completely differently next time round

You don't have to register for VAT if you don't want to and are below the £85k limit. The OPs specification of "not a large amount of money" suggests they are probably not going to be over that limit.

From the above it sounds like you would be providing your services to one client? If you are providing person service make sure you are aware of the off payroll working (IR35) rules - these can negate any potential tax benefits of using a LTD company as your income is taxed as a deemed employee before you receive it. 

I do this, I am employed full time but also have a sole directorship/shareholding of a ltd company that I used for consulting work on the side with my own clients. 

My advice is to get an accountant. 

From April 2024 self employed need to keep digital records and submit 4 returns per year plus an end of year tax return. 
 

https://www.gov.uk/government/publications/making-tax-digital-for-business-...

An accountant will save you all that time mentioned in posts above (how much can you earn in that time?) and does not have to be expensive. 
 

If you can’t afford a reasonably priced (not the big glass office rip off merchants) accountant then you can’t afford to be in business. 
 

Many hidden pitfalls and you don’t know what you don’t know. A saying in the industry is that to HMRC penalties are the new tax. 

Accountant here…

Unfortunately I can’t advise you as I have no experience in small business accounting, but can I make the suggestion that you go speak to a friendly local accountant or small business adviser before you take the advice of blokes (and ladies) off the internet.

Getting some professional advice upfront will give you some reassurance that you haven’t done the wrong thing and should minimise the risk of some government agency hassling you down the line.

As others are pointing out there are various obligations when you form a limited company (or act as a sole trader) and it’s not fun when companies house tries to fine you because you’ve forgotten to file your accounts…

If turnover is say £20k, spending 10% on an accountant seems best avoided, I'd say.

Yes, but buying a book for £25 provides what you need for simple operations.

I found the details of the companies house returns were simple enough to figure out from online resources, but I did benefit from reading a book on financial accounting from cover-to-cover.  It helped that it had callouts explaining that yes, this is daft, but it's just the way its done so suck it up and stop complaining.

This is my business book shelf:

• https://www.goodreads.com/book/show/24832429-financial-accounting-for-dummi...
• https://www.goodreads.com/book/show/112390.Mastering_FreeBSD_and_OpenBSD_Se...
• https://www.goodreads.com/book/show/340819.Blood_Music
• https://www.goodreads.com/book/show/37976541-bad-blood

depending on what you intend doing and who you intend working for you might need to be both a limited company and VAT registered.

My accountant cost £1,400 a year and they do my company books and my personal tax return for that. I do the data entry into a stand-alone accounts package (though these are hard to find nowadays as they all went online monthly payment!!)

Good luck.

Look at TaxCalc, £17 a year for MTD, and you can still use offline account package from 2003 if you want, or even spreadsheets, if you like the hassle of those.

Give Growbiz a shout - good for start-up type bits, might even come to you...

https://www.growbiz.co.uk/

Thanks I would have been keen in the past. Now I use an accountant; a strict and serious person with great staff, who will hopefully keep us on the straight and narrow path and we have a good colleague like relationship. Worth every penny, but as the son of an accountant I could hardly say different!

Previously as a sole trader (although VAT registered) spreadsheets were the way for me and I enjoyed that part of things. As I get older and move into different roles, I know the accountants will retain that key role for my colleagues. IR35 has been a major disruptor, with the corporates insisting on consultants being employed by umbrella companies who take an unhealthy chunk of money, we have been just big enough to avoid that where others have had a miserable time. 

If they've still got a full time (or near full time job) then IR35 on this "extra" work would be much less likely to apply - however, IIRC the latest manifestation of IR35 effectively requires the "employing" company to assume that everything is caught by IR35 - it was awful legislation when it came in, and it's not got any better ☹

I have been trading as a single person limited company for the last 15+ years, the best advice I can give is to go and talk to an accountant, explain your situation and ask for his advice.

If you can find one by recommendation so much the better, I have never regretted the accountant's fees as I'm sure it saves me more than that in tax and stress. I probably could do it myself but I can earn more than his fees in the time it would take me.