Sole Trader vs Limited Company
In theory, it should be perfectly feasible to operate as a sole trader, producing your own accounts and completing a self-assessment income tax return at the end of each year.
In practice, however, this is not always a suitable way of proceeding because all interim providers, and the majority of clients, insist that candidates operate under the banner of a limited company.
There are five main reasons for this:
- To avoid employment agency legislation including possible PAYE complications
- Your clients avoid the legal burden of employing a permanent member of staff (minimum wage, redundancy, SSP, maternity leave etc)
- Your clients have no hidden employment costs (pensions, holiday pay and other long-term overheads)
- Your clients have no responsibility to operate PAYE on your consultancy fees. This is extremely important since, if you are a sole trader, HMRC could dispute your status and, in certain circumstances, look to your client for income tax and National Insurance on your fees long after employment has ceased
- Being employed by your own company is indisputable proof that you are not employed by your client (although not for IR35 purposes)
At the same time, having your own company looks professional, especially if you have a well-chosen name, and this could make finding new assignments easier.
In certain circumstances (when working outside IR35) there are opportunities for the payment of dividends which could offer National Insurance and income tax advantages, and even those working under IR35 may be able to attract non-IR35 income in between interim assignments.
The downside of operating as a limited company is that you become both employer and employee, and as a result will have to bear the employer's responsibility for National Insurance contributions. However, we strongly recommend our clients to build this amount into their daily rate.