Setting up a business is a complicated process, especially when you take it on in a foreign country. The most important decision you will have to make at the start, however, is the type of business you choose for your venture.
Summary & key takeaways
- Self-employment requires UK residency; an LTD owner does not have to be a resident.
- Self-employment means simple accounting, a tax-free allowance and an annual Self Assessment.
- An LTD company pays 19% Corporation Tax and needs no founding capital.
- VAT registration applies to both forms once turnover exceeds £85,000.
- The self-employed are personally liable for debts; an LTD director is not.
In the United Kingdom, the most popular forms of running a business are the Ltd company and self-employment. Let’s take a closer look at them.
Basic facts about being self-employed
Being self-employed in the UK is a form of running a business intended for British residents, i.e. people who spend at least 183 days a year in the United Kingdom and have a permanent home address. It can be compared to a Polish sole trader business. The arguments for choosing this form of business are simple accounting, a high tax-free allowance and relatively low National Insurance contributions.
Basic facts about the Ltd company
A Ltd company in England, i.e. a Private Company Limited by Shares, is a company with legal personality that must have its registered office in the country, but its owner does not have to be a resident of the United Kingdom. It can be registered on your own or together with your business partners, and the way it works can be compared to a limited liability company. It is the form of business most often chosen by so-called freelancers, due to its low running costs and the absence of a minimum founding capital requirement.
How to register each type of business?
Registering a business in the United Kingdom is far less complicated than in Poland. For self-employment, you need to register with HMRC, providing your personal details. A self-employed person is required, among other things, to keep financial records and to file a Self Assessment document once a year.
On the other hand, to register a Ltd company in the UK, you need to complete the relevant registration documents with HMRC (HM Revenue and Customs, the British equivalent of the tax office) within three months of registering the business in the companies register. A Ltd company in the UK must have a natural person appointed as its director.
Taxation of self-employed vs. Ltd
An important factor for or against a given form of running a business is UK taxes and their level. For the self-employed, it is necessary to pay Income Tax and insurance contributions. Registering for VAT in the UK is also required once the business’s annual income exceeds the £85,000 threshold.
Ltd companies pay Corporation Tax, i.e. income tax at a rate of 19%. It will also be necessary to pay tax on the director’s salary, unless the director pays themselves a salary below the tax-free allowance. As with the self-employed, VAT in the United Kingdom applies once the company’s annual income exceeds £85,000.
Who is responsible for repaying debts?
The most often overlooked, but exceptionally important issue when choosing a type of business is the question of repaying any company debts. Winding up a company is never a pleasant process, but when a Ltd company is liquidated, its director/owner has no liability to repay its debts. Unfortunately, with self-employment, as the owner you bear full responsibility for the business’s liabilities and debts.
Self-employment and the Ltd company differ in how they are registered, how they are taxed and the level of responsibility resting on the owner. When choosing one of them, go with the form of business that better suits the nature of your venture.
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