Small Business Advice

Changing from sole trader to limited company

26 Mar 2019

Changing from sole trader to limited company

Many businesses begin life as a sole trader by default, it's just how most people start out. But it comes to changing from sole trader to limited company, what is the best way to go about it? 

With more personal responsibility on you as a sole trader when it comes to factors such as losses and tax, changing to a limited company structure might be the best option for you as your business continues to grow.

However, despite this process being a natural transition for many business owners, few take the time to devise what is the optimum way of changing from sole trader to limited company.

In addition to understanding the difference between a sole trader and limited company, there are several factors involved in making the right decision on changing structure. These include the tax you pay as a sole trader, the money you can free up in the form of a director’s loan, and the value of your existing business.

As a leading accountants in London, our team of experts are fully equipped to analyse and understand your business, and help you make a totally informed decision on whether you should continue as a sole trader or move into the limited company ranks, as well as guiding you through the incorporation process.

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How to change from sole trader to limited company UK

According to our team of tax accountants, there are two options for changing from sole trader to limited company - Option A and Option B.

Option A - Incorporation Relief

Incorporation relief is the default position of any individual incorporating a sole trader business to a limited company.

In this option, incorporation relief delays paying capital gains tax (CGT) if you transfer your sole trader business to a limited company in return for shares rather than cash.

Incorporation relief broadly means that any CGT charge on the whole, or part, of the gains is postponed until the person transferring the business disposes of the shares. In other words, until you exit the limited company.

Option B - Capital Gains Tax

On the contrary to Option A, the sole trader can decide against applying incorporation relief to their gain and, instead, pay CGT upfront.

The little known benefit to this option is that by opting to pay CGT immediately, a director’s loan account (DLA) worth the value of your sole trader business can be drawn down from the limited company completely tax-free.

In this case, the value of the sole trader business is calculated based on its tangible and intangible assets.

Business valuation is a tricky process for any business owner to contend with, yet it is naturally the first thing most owners want to know when selling. Get in touch with our business consultant today and to talk about getting an accurate valuation of your business.

Advantages of incorporation

One of the key advantages is financial. The tax efficiencies associated with a limited company can make it the most profitable way to run your business. If you're earning more than £35,000 a year, it can definitely pay dividends.


By taking your remuneration as a combination of salary and dividends you could potentially take home more of your earnings than if you were a sole trader.


Fatter paychecks and greater flexibility

For example, say you pay yourself a salary of £6,000 and a dividend of £32,000 in the 2019/20 tax year. As your salary falls within the personal allowance there's no income tax to pay. In addition, because you're earning less than £155 a week, you won't pay national insurance.  


You'll also be able to add the £5,000 of your unused personal allowance to your £2,000 dividend allowance, letting you take £7,000 of your dividend tax-free.

The remaining £25,000 is taxed at 7.5%, giving a tax charge of £1,875, and meaning you take home £36,125 of your £38,000 earnings.  


Even taking the £6,400 of corporation tax paid by the company on the dividend into account, this stacks up well against how much a sole trader would take home.


Being a limited company also offers more flexibility in the way you manage your expenses. If you travel or eat out while on business, you may be able to claim some or all of this expenditure. You can also buy tools you need through your business to further increase its profitability.


It can also improve your business. Providing your services through a limited company is often seen as more professional as well as offering you greater financial protection if something goes wrong. Unlike a sole trader who could be personally liable if they're sued, liability rests with the limited company.  


Role of the accountant

There's more responsibility and paperwork to consider but much of this can be outsourced to a small business accountants, like us, who specialise in supporting new and existing limited companies. By plugging into our expertise, you can focus on the success of your business.


To find out more about going limited, or any other tax issue, get in touch and speak with one of our experts.

Keir Wright-Whyte


Managing Director

0207 043 4000

About the author

Originally graduating with a degree in geography from Edinburgh University, Keir claims that he was then tricked into becoming an accountant by one of the UK's top 5 accountancy practices.The deception extended to the usual training in audit and associated activities.

Keir subsequently worked in a number of advisory roles with clients including in the energy trading, pharmaceuticals and financial services sectors.

He loves working at Accounts & Legal because of the variety of work and clients, the excellent team ethos and morale, the importance placed on genuinely helping and being useful for clients and because he believes what he does matters to clients and helps the firm.

Keir's primary role is to ensure that new clients with complex businesses or needs are on-boarded in the best way and he is a "trouble shooter" both for clients and where complex issues arise internally. He also helps the accounting teams strive to improve what we do for clients, whether processes or services.

When not debiting or crediting, Keir has a penchant for fixing old buildings, skiing, surfing and cycling.


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