What Is the Difference Between Self Employed and Limited Company Tax

The key difference between self employed and limited company tax

The main difference between being self employed and running a limited company lies in how profits are treated and how you pay tax.

If you are self employed, you and your business are considered the same legal entity. You pay Income Tax and National Insurance on your profits through the Self Assessment system.

If you run a limited company, the business is a separate legal entity. The company pays Corporation Tax on its profits, and you pay personal tax on the money you take out as salary or dividends.

This separation affects how much tax you pay, your reporting responsibilities, and the level of financial protection you have.

How self employed tax works

When you are self employed, you report your income and expenses each year through a Self Assessment tax return.

You pay tax on your profits, which are your total income minus allowable business expenses such as equipment, travel, or insurance.

Types of tax you pay as self employed

Income Tax:
You pay Income Tax on your taxable profits above your personal allowance, which is £12,570 for the 2024 25 tax year.

20% basic rate on profits between £12,571 and £50,270.

40% higher rate on profits between £50,271 and £125,140.

45% additional rate on profits above £125,140.

National Insurance Contributions (NICs):
You pay two types of NICs:

Class 2 NICs: A flat rate of £3.45 per week (if profits exceed £12,570).

Class 4 NICs: 9% on profits between £12,570 and £50,270, and 2% on profits above £50,270.

You do not receive payslips as a self employed person, but you must keep detailed records and pay your tax by 31 January each year.

Advantages of being self employed

Simpler setup and fewer administrative requirements.

You keep all business profits after tax.

Easier to withdraw money when needed.

Disadvantages

You pay higher personal tax rates on profits.

No separation between you and your business, so personal assets are at risk if the business fails.

Fewer tax planning opportunities compared with a limited company.

How limited company tax works

A limited company is legally separate from you, even if you are the only director and shareholder. The company has its own bank account, pays its own tax, and must file accounts with Companies House and HMRC.

1. Corporation Tax

A limited company pays Corporation Tax on its profits after deducting allowable business expenses.

The main rate of Corporation Tax is 25% for companies with profits above £250,000.

A small profits rate of 19% applies to companies earning £50,000 or less.

Companies earning between these two thresholds pay a marginal rate that gradually increases.

Corporation Tax is paid nine months and one day after the end of the company’s accounting period.

2. Income Tax on salary and dividends

As a director or shareholder, you can pay yourself in two main ways:

Salary: The company can pay you a salary like an employee, subject to PAYE tax and National Insurance.

Dividends: You can also take dividends from company profits after Corporation Tax is paid. Dividends are taxed separately at lower rates than income.

For the 2024 25 tax year, dividend tax rates are:

8.75% for basic rate taxpayers.

33.75% for higher rate taxpayers.

39.35% for additional rate taxpayers.

The first £500 of dividends each year is tax free due to the dividend allowance.

3. National Insurance for directors

Directors pay Class 1 NICs on their salary, but not on dividends. This is why many company owners take a small salary (to qualify for state benefits) and the rest of their income as dividends, which are more tax efficient.

Advantages of a limited company

Lower overall tax rate on profits when structured correctly.

Limited liability protection, meaning personal assets are safer.

More opportunities for tax planning and profit retention.

Ability to claim a wider range of business expenses.

Disadvantages

More administration, including filing annual accounts and Corporation Tax returns.

Accountancy and compliance costs are higher.

You cannot freely withdraw money; it must be taken as salary, dividends, or loans.

Comparing how much tax you pay

Example

Let’s compare a self employed person and a limited company director, both earning £50,000 in profit.

Self employed person:

Income Tax (after £12,570 allowance): £7,486.

Class 4 NICs: £3,369.

Total tax: £10,855.

Limited company director:

Corporation Tax (19% small profits rate): £9,500 profit before tax, £1,805 tax due.

Take £12,570 salary (no income tax).

Take £37,430 dividends (after Corporation Tax).

Dividend tax: £2,939.

Total tax: Around £4,744 (plus smaller employer NICs).

In this example, the limited company structure saves around £6,000 in tax, although the actual benefit depends on your circumstances and how you draw income.

Other tax differences to consider

VAT registration

Both self employed individuals and limited companies must register for VAT if turnover exceeds £90,000 per year (2024 threshold). The rules are the same for both structures.

Expense claims

Limited companies can often claim a wider range of business expenses, such as director’s pensions or business insurance, while self employed individuals have more restrictions.

Pension contributions

Company directors can make employer pension contributions directly from company profits, which are deductible for Corporation Tax. This is not possible in the same way for self employed individuals.

Tax-free allowances

Self employed people benefit from a trading allowance of up to £1,000, allowing small earnings without tax reporting. Limited companies do not have this allowance but can benefit from lower tax on retained profits.

Which is better for you

The right structure depends on your income, goals, and risk appetite.

Self employed: Best for small or simple businesses with low overheads and profits under £30,000.

Limited company: Better for higher earners who want to reduce tax and protect personal assets.

If your profits are growing or you plan to reinvest in your business, forming a limited company can be more tax efficient. However, if you value simplicity and flexibility, remaining self employed may be easier.

How an accountant can help

An accountant can compare both options and calculate how much tax you would pay under each structure. They can also:

Register your business with HMRC or Companies House.

Manage your bookkeeping, tax returns, and payroll.

Advise on the best combination of salary and dividends.

Ensure you claim all available tax reliefs.

Getting professional advice early ensures you choose the most tax efficient and compliant structure for your situation.

Final thoughts

The difference between self employed and limited company tax mainly comes down to how profits are taxed and how you draw income. Self employed people pay Income Tax and National Insurance directly on their profits, while limited companies pay Corporation Tax first and then personal tax on any money taken out.

Each option has its pros and cons, and the best choice depends on your income, business growth plans, and level of responsibility you are comfortable with. Speaking to an accountant will help you make the most informed decision and ensure your business is structured for maximum tax efficiency.