It's one of the most common questions we get. Should I stay a sole trader or set up a company? The honest answer is that it depends, but there are clear signposts that tell you when the switch is worth it.
How each is taxed
As a sole trader, your business profit is taxed as your personal income, at rates that climb as you earn more. A company pays a flat tax rate on its profit, which is lower than the top personal rates. That gap is where the potential saving lives, but it isn't the whole story.
The catch with companies
Money in a company isn't automatically yours. To get it into your personal hands you have to pay yourself a wage or a dividend, and that gets taxed again in your name. The flat company rate only helps if you're leaving profit in the business to reinvest rather than drawing it all out to live on.
When a company starts to make sense
The switch usually pays off once your profit is consistently high, you're retaining earnings in the business, or you want the legal separation a company provides between business and personal assets. Below a certain income, the extra compliance cost outweighs the benefit.
It's not only about tax
Liability protection, credibility with larger clients, and the ability to bring in other owners all factor in. Tax is one input, not the whole decision.
The bottom line
There's no universal answer, only the right answer for your numbers. Before you restructure, it's worth running the actual figures both ways so the decision is based on maths rather than a rule of thumb you heard somewhere.
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