One of the most popular questions for skilled specialists is whether they should incorporate their business or be self-employed.

Being a specialist in your trade takes a lot of hard work and years of training, so it’s understandable that you’d want to decide on a business structure that benefits you financially and operationally.

Both have their advantages and disadvantages. It’s all about weighing your options and deciding which one appeals to you more.

It always helps to know both options’ ins and outs, so we’ve put this article together.

Here’s what you need to know about incorporating or being self-employed as a skilled specialist.

Structure for skilled specialists

There are several important factors to consider when deciding on a structure for your business. Some of these factors include:

• number of employees
• profit levels
• how much equipment you buy for your business
• your chosen industry

For example, specialist contractors will have to decide carefully how they wish to structure their business. This is largely due to IR35 regulations and how they affect the way a contractor would pay tax.

With careful planning, if a contractor decides to incorporate, they would be able to pay themselves with a mix of salary and dividends, therefore minimising their tax liability.

What’s the difference?

Although this may sound like a simple question, there are a few more things to consider when deciding between incorporating or being self-employed.

For a start, as a sole trader (self-employed), you are your business. You have complete liability and control over how you operate, but also you’re solely responsible for your business’s tax obligations and finances.

If you decide to incorporate, you are splitting yourself from your company as a legal entity. This means that while you still retain some liability for debts your company might owe, your personal life won’t be as heavily affected should something go wrong.

Depending on the amount of profit you make and the way your business runs, a limited company structure might be more tax-efficient.

Pros and cons of being self-employed

As we mentioned, if you decide to run your business as a self-employed worker (or sole trader), you will have complete liability for it.

This means that any profit you make is entirely yours (once you’ve settled your obligations to HMRC), but on the flip side, any losses you incur will also have to come from you. This means that any debts will be yours to deal with, which can be stressful in itself. In the worst case, it might put your personal assets at risk.

Each year, you’ll be required to complete a self-assessment tax return, declaring your annual profits and calculating how much you owe HMRC in tax. This needs to be done before midnight on 31 January, so it’s essential not to fall behind.

The other upsides, though, are you are free to decide on your business structure, pick and choose what jobs you want to take on and how to brand yourself as a business. This gives you the perfect opportunity to push your values into your working processes. That being said, you can still do this if you’re the only director of your limited company.

When you reach a certain amount of profit each year, you’ll be taxed at different rates. It’s worth being self-employed up until the higher income tax limit of £50,270, as you’ll only have to pay 20% on your earnings. Once you go past this threshold, your income tax percentage will jump to 40%.

An additional rate of 45% exists on income over £150,000.

Pros and cons of incorporating

One of the most attractive prospects of incorporation is deciding to split yourself as a legal entity from your company. This gives you more protection than if you were a self-employed business owner.

Granted, the bigger decisions for the company will have to be agreed upon by the board of directors and shareholders (assuming that you’re not the sole shareholder, that is), but if there is a loss over the year, it won’t fall directly on your shoulders.

By being a limited company director, you can often pay yourself in a much more tax-efficient manner. Corporation tax is currently set at 19% (and will no longer rise to the expected 25% following the Chancellor’s recent speech).

This means as soon as your company starts making a profit, 19% of that will go to HMRC (excluding any reliefs and allowances you qualify for). But it’s often a better option when you compare that to the potential 40% that you would pay if you were self-employed.

As a director, you can also pay yourself with a mix of salary and dividends. By paying yourself just under the annual allowance of £12,570, you won’t incur any income tax. You are then free to top up your wages with dividends, which are taxed at a different rate.

Trouble deciding?

Granted, it isn’t an easy decision to make, especially early in your business’s lifespan.

That’s why the team at Durrani & Co are here to help you. We believe you should be entitled to more of the money you work so hard to earn. So we are perfectly placed to advise you on whether incorporating or trading as a self-employed business owner is the best decision for you.

Get in touch with our team today to find out more.