01252 975000 info@aviatrixacc.com

Universal Credit Agency is advising sole traders on low incomes to register as a Limited Company

Recently it has come to my attention that the Universal Credit Agency is advising sole traders on low incomes (probably due to COVID) to register as a Limited Company and to register a PAYE scheme in order to access Universal Credit or Childcare Credits.

The reasoning is that if they are ‘employed’ and on a PAYE scheme, they are then an employee with payslips which can be easily measured for Universal Credit purposes. I have also noted that a few online banks, especially the new ‘App’ based banking facilities are promoting registered companies for the user, as well as certain online bookkeeping brands.  

Increased costs and red tape

My concern is that new business owners, who may have been previously employed their whole working lives, are being directed down the route of registration, red tape, higher costs and more administration simply to make life easier for credit agencies and banks.

The decision to go ‘Limited’ has historically been a considered one for small business, after trading as a sole trader or as a partnership for a sensible amount of time. This period of time has allowed businesses to build up their client base, see what their costs are, which direction their market is going in, and can change the direction of their trade swiftly. The small personal or partnership income after costs is easily totalled by any competent bookkeeper, and can be filed with the HMRC personally or a trusted professional for a reasonable fee. 

When a business is registered at Companies House the rules are a little different, first of all the owner doesn’t receive the turnover, the business does, the business is now a separate entity, it is no longer an individual, and the money received from customers now belongs to the company. I always tell my clients to imagine the company as an animal which is now living with them, it has to be fed, looked after and shown off to the world at least once a year!


To give you an idea, I have listed below the key differences between the two:-

Registered Company/Partnership Options Unregistered Business/partnership
Separate bank account- with business banking fees Bank Accounts  Personal account can be used, or you can opt for Business banking
Records have to be kept for 7 years for HMRC HMRC Records Records have to be kept for 7 years for HMRC
Income and expenditure belongs to business, records to be kept in a formalised structure Bookkeeping Income and expenses are yours, a simple spreadsheet recording cash received and paid is sufficient
Accounts  to be presented under Generally Accepted Accounting Principles, will need a professional for presentation Accounting Income and expenses report used in self assessment return is sufficient
Separate registration, PAYE submissions to be made regularly, will require knowledge of PAYE/NIC Payroll Self Assessment tax is based on profit/loss from business, any losses in year can not be carried forward but can offset income or employment from elsewhere.
Confirmation statement to be submitted annually, annual accounts to be submitted within nine months and one day of year end. Companies House Returns Unregistered so nothing required.

 YOUR Business and how you want to trade

I could go on about the pros and cons of being a registered business or not, but as the table shows, it should be considered on the basis of YOUR Business and how you want to trade. When clients who have been encouraged to go Limited by their main employers – there can be repercussions as we have seen with the Journalists and others under IR35, and I have had more than one client complain that they thought being a Limited entity would save them tax, but they have ended up paying more, balancing Corporation Tax, PAYE and NIC and Self Assessment Tax (remember as a company director you still have to file a Self Assessment return even though you are ‘employed’!).

 The Tax Side Of things

To be clear, whenever you make money either personally or through a registered company, there is going to be tax to pay. How much tax usually depends on your circumstances, the company structure, how many other people are involved in the business, how much you profits were and many other factors, in other words it depends on a lot of factors.

As rule of thumb however, if you have a low income and do not expect to have profits of over £50k (the current personal allowance and 20% income tax threshold) for the next 2-3 years, then you  are most likely to be better off as self employed. If this is looking to change please call us and we can discuss your options. You can plan to go Limited in a year or so, and save a lot of tax long term!

 Why the differences?

Well the big differences in the two business are the PAYE, National Insurance  and Corporation Tax, Corporation Tax is pushed as the lower rated tax, currently 19% on trading profits with no upper limit it would be lower than personal tax rate which goes up in stages. But what we have to consider is if your annual income is regularly less than £50k, do you  want to pay for the additional bookkeeping (accounting software will NOT do your accounts for you, it is a tool reflecting what you put in), accountancy and filing fees and banking fees to save a few pounds in tax?

As an accountant I am often asked to do the comparison for individuals looking to transfer their business to a registered company and they are usually surprised about the additional costs they have to consider.

 Registering for a PAYE scheme

As a self employed person, you  do not need a PAYE scheme, unless you employ other people, in which case you can set  up a scheme as a sole trader/partnership  and run the payroll or CIS Scheme (Construction Industry Scheme) from this. Unless you just want to pay yourself Dividends from your business, you will need to set up a scheme to earn money from the business you have just set up.

 What About VAT?

Individuals can be VAT registered, just as unregistered businesses can, if you currently have qualifying turnover of over £85k you should be VAT registered anyway, but if your turnover is less than this, but there is another reason which makes it costs effective to be VAT registered, then talk to us about registering as a sole trader or partnership for VAT.

 Who are you running your business for?

Running you own business is not easy, anyone who has done so would probably agree with me, it has many benefits, and also it can give you many headaches, but however you decide to trade it should be your decision, not that of the bank who is looking to charge banking fees after your ‘free period’ or a government agency who is inundated with applications because their system is flawed and they want to make their process simpler.

The people that are contacting Universal Credit are small traders on very low incomes, and most suited for self employed status as it is usually simpler and cheaper to run.  The advice to set up a registered company and a payroll scheme for them is an unnecessary complication and additional demand on time and resources, which could be better spent on growing their business so that they  are more self sufficient.

If you are thinking about your trading options, I hope that this article has given you some things to think about, and I am happy to discuss your own circumstances to assist with your decisions. The important thing is that you are aware of your options and wise to the pitfalls of setting up a company, so that when you look back on your first few years of trading, you feel positive about your choices and that you have a firm basis from which to grow your business.

Contact me for further help and advice

Either click on the button below,  call  01252 975000 or email me info@aviatrixacc.com

I would love to hear from you


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