The business of wedding photography
Wedding Photography Limited Company vs Sole Trader
Hi there, I am Radek
Let's set the scene
Before we dive into the ins and outs of setting up your wedding photography business as a Limited Company and why it may be a better idea for you than being a Sole Trader – I’d like to introduce myself to you.
I’m Radek. You may know me as the Photomagician – Scotland Wedding Photographer. You probably also know that a while ago I used to be a professional magician – that’s where the Photomagician name came from.
The part I don’t advertise is that I’m also a management consultant. There are loads of types of those and neither is even a little bit creative. Without boring you to death – I specialize in planning and controlling performance on major construction projects in industries such as Oil & Gas, Aviation and Rail. My niche in that area is forensic delay analysis and alternative dispute resolution methods. If you’re wondering if I walk the walk – Photomagician is a limited company.
So. Should you go Ltd? What are the benefits of that? How do you go about that? I’ll try to do my best to explain it all in this article.
Ltd vs Sole Trader
What is the difference?
Being a Sole Trader means you trade as an individual and are personally responsible for debts and liabilities.
Being a limited company means you are trading as a company. Yep. A company of one. Your company is a separate legal entity and you are the director, the shareholder and its employee. All in one. Smart, huh?
Its own legal identity, so as a shareholder your liability is limited (hence the name 'limited by shares').
There is little distinction between you and the business. Any business debts become your debts and your personal assets - including your house - are not protected.
Accounts and tax returns
Must prepare annual accounts from the company's records at the end of the financial year. These are filed with HMRC as part of the company tax return and sent to all shareholders and Companies House. A limited company must also file a Confirmation Statement with Companies House, which includes information about the directors, shareholders and registered office.
Not legally required to have or file annual accounts but still have to keep a record of business expenses and income to fill in their tax returns.
Why would I want to be a LTD company?
Bottom line - money. It does not mean you will MAKE more money, but means you have an opportunity to be more tax-efficient meaning you will KEEP more money instead of paying them as tax. Being a limited company may also open your business up to opportunities you may not have while trading as a sole trader (see section below).
An incorporated company, whilst not guaranteeing reliability, gives the impression of a soundly based organisation and may appear more credible.
In certain sectors, contractors or agencies may choose to not work with sole traders because of the lack of legal protection as compared to limited company.
While this won't make a difference in wedding photography, if corporate headshots or property photography is your thing, you may find setting up a limited company beneficial to your image.
Will you earn more money as a limited company or as a sole trader?
If profits are above £25k per year you may well benefit from going limited; however even if your profits are lower it’s probably still worth having a chat with an accountant as they are able to find ways to make your company more tax efficient.
Which one is simpler to run - Ltd or Sole Trader?
Arguably there's not much difference other than some administrative differences.
In both cases you have to keep the track of your revenue and expenditure. You also have to fill in a tax return to let the tax man know how much profit you have made so that you can pay the correct amount of taxes.
How complicated is the paperwork for a limited company?
Paperwork should take about 15 minutes per month. You will need to send your annual accounts to Companies House by a fixed date each year, complete an Annual Return (a list of directors and shareholders) and submit a tax return and accounts for Corporation Tax purposes. You will also have to complete a personal tax return.
The administration isn’t difficult or particularly time-consuming but it is easy to miss tax-saving opportunities. For example - would your business be better on the standard VAT scheme or the Flat Rate VAT Scheme, and what’s the most tax-efficient way to take money out of your company?
How am I taxed as a Sole Trader?
A sole trader must pay tax on business profits (revenue minus expenses). As a Sole Trader, all your income is taxed according to income tax rates and bands, meaning that:
1. Personal Allowance: £12.5k is free of tax
2. Starter rate is taxed at 19% between £12,500* – £14,549
3. Basic rate is taxed at 20% between £14,550 – £24,944
4. Intermediate rate is taxed at 21% between £24,945 – £43,430
5. Higher rate is taxed at 41% between £43,431 – £150,000
6. Additional rate is taxed at 46% over £150,000
Additionally you pay National Insurance contributions
*the rates above apply to Scotland only.
How am I taxed as a Limited Company?
You pay fixed rate of 18% of corporation tax on all your taxable profits (revenue - expenses).
How you will be taxed personally is dependent on the level of income that you draw from the company. This income can be structured in a tax efficient manner.
You also have the option to leave ‘reserves’ in the company to help with future growth and development (remember, with a limited company you only pay personal tax on the money you take out of the business).
1. The tax-free dividend allowance is £2,000.
2. Basic-rate taxpayers pay 7.5% on dividends (between £2k and £37.5k).
3. Higher-rate taxpayers pay 32.5% on dividends (between £37.5k and £150k).
4. Additional-rate taxpayers pay 38.1% on dividends.
Can you give me examples of figures calculated for both types of businesses?
Sure. CLICK HERE and enter your taxable profit figure. The website will calculate your taxes and will show you the difference.
The figure above is not high enough to justify the extra administrative burden. Is this all there is to it?
Not at all. This is where the fun begins.
1. Let's assume that you want to make an investment - for example buy a property. As a sole trader you would pay tax on all your earnings and only then with whatever is left, you would pay for your property. That means you could be losing a lot of money just by paying your income tax and NI contributions (some of it could be taxed at 40% or more).
As a limited company you can invest money directly from the company, before you pay yourself. This means that your profits would be only taxed at 18% leaving you with more to invest. Remember it's only when you pay yourself a salary or a dividend where income tax and dividend tax apply.
2. Think long-term. As company director, you can choose to leave dividends in your business to help build it up. Yep, that means you can choose to build up the amount of money in your company that is taxed at only 18% and retain it till the next year and next. If you don't need the money above a certain threshold, why would you give it to the tax man at a higher tax rate every year if you can simply keep in your company until you need it (and in the meantime let it work for you).
3. If you're VAT-registered (currently the threshold is £85k), you may increase your profit by using a flat VAT scheme. While you charge your clients 20% VAT on top of your rate, you only pay roughly 11% back to HMRC, meaning you keep the difference. You also get further 1% discount if you’re in your first year as a VAT-registered business.
4. If you decide to sell the business, it may also be easier to find a buyer for a limited company rather than a sole trader.
How will I decide how much to pay myself and how much to keep in the business?
This is entirely up to you, as long as the business can afford it. You need enough to live on, but there is no point taking out more than you need and being taxed personally on it.
Profits are usually taken as dividends which do not attract National Insurance, which may help reduce your overall tax liability.
Do I have to be VAT registered to be a Limited Company?
VAT registration is the same for both sole traders and limited companies. You are not obliged to register until you meet the turnover threshold as a company or a sole trader but you may choose to register as they may well be good tax reasons to do so, call us or check with your accountant.
What if I decide I no longer want to operate as a Limited Company?
All you have to do is complete a form to be removed from the register of companies at Companies House.
Should I become a Limited Company?
The more money you make, the higher the chances that being a Limited company will be more financially rewarding for you.
From a financial standpoint, this is a decision best made on a case-by-case basis, in discussion with a reliable accountant.