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Ask Your Own Question, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 5145
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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I need to set up my own business or become a sole trader

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Hi - I need to set up my own business or become a sole trader in order to have a contract with my new employer that is based in the US.
I thought i would just set up a limited company but then saw stuff about being a sole trader. I am not quite sure of the difference - but I am presuming that because my new job includes an equity stake, it is probably better to have a limited company - is this right? And if so, how do i pay myself from the company in the most tax efficient way? I will have lots of expenses relating to my job too.
Any help much appreciated!

Hello and welcome to the site. Thank you for your question.

Please expand on this "I am presuming that because my new job includes an equity stake, it is probably better to have a limited company - is this right?"

What do you mean by new employer .. is the company in US going to employ you or have a contract for services?

Many thanks

Customer: replied 2 years ago.

Hi there - as I understood it they cant employ me under a normal contract because they are based in the US and do not have a UK company registered. So are going to contract my newly-set up company for my services.

I am being paid a flat rate to include expenses, which I will want to offset from my tax. Just wondering how this works and will I need to employ an accountant more permanently?


Louisa, thanks for your reply.

If the contract is between a US based company and a UK based company, then you would become an employee of the UK based company (i.e. your own LTD company).

You should pay expenses out of the UK company that are covered by the flat rate income from the contractor (the UK based company).

You may need to employ an accountant at some stage if you are unable to handle your affairs by yourself. My advice is use your resources where your expertise lies and it pays to have a qualified accountant to handle accounting and tax issues.

Your opening statement said "I need to set up my own business or become a sole trader in order to have a contract with my new employer that is based in the US."

You would be better off setting up a LTD company - it also protects you with limited liability, the company being a separate legal entity.

Here are the two alternatives -

As a sole trader your profits would be taxed at your top slice rate whether you draw them or not.

Income tax on income after allowances....

first £31,785 at 20%, £31,786-£150,000 at 40% and over £150,000 at 45%

Profits would also be liable to NIC Class 4 if your income was UK based. If all of your self-employed profits were from overseas based operation then you would be exempt from paying Class 4 NIC.

Here are NIC rates for tax year 2015-16

Profits between £8,060 and £42,385 at 9%

Profits above £42,385 at 2%

In addition, you would be paying NIC Class 2 at a flat rate of £2.80 per week.

You file personal tax return and report your self-employment profits on supplementary page SA103.

Accounting reporting requirements are not governed by Company Act legislation and are not that strict.

The other option would be to operate as a LTD company.

The accounting and reporting requirements are governed by Companies Act 2006 and Financial reporting Statements (Accounting standards).

Company accounts are prepared on an annual basis. You pay Corporation tax at 20% on profits up to £300,000. Tax is due nine months and a day after accounting period end. CT return is due 12 months after end of accounting period. Say the company was formed in Mar 2015 and the year end is Mar 2016 and annually thereafter, your first CT would be payable no later than 1 Jan*****returns due by 31 Mar 2017. You have flexibility on salary/dividend mix and you don't have to distribute all taxed profits as dividends.

Dividends are taxed at 10%, 32.5% or 42.5% as the top slice of your total income.

There are other HMRC requirements e.g PAYE and you still have to file a personal tax return.

I have explained to you the two alternatives.

You would be best advised to seek consultation with a good accountant before you decide which route to adopt. He would be able to also advise you on costs associated with accountancy services and other associated regulatory costs.

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

Customer: replied 2 years ago.

Thank you for this - and just to clarify - if I decide to go the sole trader route - would that also entail setting up a company? Because my US employer seems to think the only route is through a UK -reg company. If that's not the case, then I probably wouldn't need to look into the sole trader route.

Louisa, thank you for your reply.

If you decide to go the sole trader route, you would have to register for self assessment as self employed and there is no need to set up a LTD company.

If you decide to go the LTD company route, you would have to incorporate a company.

I have explained the alternatives in my previous posting.

I hope this is helpful. and other Tax Specialists are ready to help you