Are you Employed, Self-Employed, or Neither if you own a Limited Company?

Ryan Patrick

Mar 22, 2024 • 6 min read

After or before registering your limited company, you may wonder what your employment status is when you trade through this company. Will you be employed or self-employed? Will it affect the amount of national insurance and tax you must pay? These questions make many new company owners confused. However, when you know how to go about it, it's pretty easy.

This blog will help you understand the importance of employment status, whether employed, self-employed or neither, when owning a limited company.

The Importance of Knowing Your Employment Status

Knowing whether you're employed, self-employed, or neither makes a difference in the amount of national insurance and tax you must pay and how to pay it. If you're employed, your employer must pay Class 1 National Insurance Contribution and PAYE (pay as you earn) tax on your wages to the HMRC on your behalf. When you're self-employed, you will pay income tax via the self-assessment tax return and Class 2 and Class 4 national insurance contributions to the HMRC.

You should also know if you're employed or self-employed when owning a limited company because of universal credits and tax credits.

Limited Company Directors and Shareholders' Employment Status

When you're a limited company director or a shareholder, you're an owner and an employee based on your positions. This means that although you're running your business, you are your business employee, so you’re not under the self-employed class for tax purposes.

This is because the limited company structure is unlike a sole trader, where the owner and the company are one. A limited company is registered as a separate and independent business. The company has distinct rights that are different from those of its shareholders and directors.

As a company director, you are an employee and officeholder for tax purposes; you work on behalf of the business and its members. Then, the business pays you a salary that is taxed through PAYE.

Additionally, when you're a shareholder, you benefit the company owner. You hold shares and share the company's profits in exchange for investing in the business. As a shareholder, you receive company income as dividends.

The dividend tax rates are friendlier than those for National Insurance and Income Tax that apply to a director's salary. As a result, many small, limited company owners opt for a lower director's salary and higher dividends, representing a highly efficient method of paying oneself through a company.

The Taxes to Pay as a Company Director

Like many employees, a company director receives payment where tax and NIC are deducted via the HMRC PAYE system. Although you are a director, your salary acts like the employment earnings, not the self-employment earnings.

So, based on how much you pay yourself as your monthly salary, you will be liable for Class 1 national insurance contributions and income tax deductions. Your business may also be responsible to Class 1 employers NI on your earnings. The company deducts your earnings through the payroll every payday and sends the tax and NIC to HMRC every month.

The Taxes You Pay as a Shareholder

Your dividends are categorised as investment income, taxed differently from a director's earnings. Dividends are money you get paid from business profits. Remember, the business has already paid corporation tax on profits. So you don't have to pay NIC and tax on dividends.

As a shareholder, you're entitled to a £1,000 tax-free annual dividend allowance. However, above the £1,000, you will have to pay dividend tax at lower rates at 8.75%, 33.75%, and 39.35% in the 2023/24 tax year. The income tax category band determines the rates.

Dividends are not subject to automatic taxation. You must declare and settle the tax on dividend income by completing a Self-assessment. You must file a personal tax return each year and pay any extra tax owed to HMRC.

Which is Better, Being Employed by a Limited Company or Being Self-Employed?

Running your business under a limited company has numerous benefits but also depends on your business objectives, circumstances, and financial targets. Operating self-employed as a sole trader is also a great choice since you enjoy the freedom of personal liability, but this freedom has its setbacks.

Let's explore the benefits of each type of business and help you make a better choice. And if you would like to form your business in the UK, you can contact Incorpuk today.

Benefits of Being Employed Under a Limited Company

Tax purposes: working under a limited company is better based on the taxes you pay. However, it is only better if you plan tax matters. Additionally, it is crucial to ensure that the company's administrative tasks and compliance requirements are promptly and fully addressed.
Separate legal entity: whether you're a director or a shareholder in a limited company, your assets are risk-free in case of business solvency or bankruptcy. The same applies when you're indebted; the company assets are safe since they belong to the company, not you. The rule protects your personal and company assets because you and your business are separate.
Company directors and shareholders: if you want to expand your business, you can bring more shareholders and directors in the future to share responsibilities and raise share capital.
Credibility: employment under a limited company provides you with credibility since the company has a director; this enables shareholders and creditors to invest in the company efficiently.

Benefits of Being Self-Employed

Here are the benefits of being self-employed:

As a solo trader, you have an advantage of owning a company: UK sole traders can maintain simplicity in managing their affairs and keep their overall costs down during the initial stages of their business. Moreover, unlike directors of limited companies, sole traders can more easily wind up their operations and transition to new endeavours in case of business challenges or failure.
Higher profit since you own the business alone: When you're self-employed, there's greater privacy since your business name and information are not accessible through the public domain like in private companies.
Cost-effective: As a sole trader, you'll find that you can achieve higher personal income if you effectively manage your tax and national insurance contributions. Being self-employed, your primary responsibility is to ensure you complete the self-assessment by 31st January annually. However, it's worth noting that filing taxes as a sole trader isn't straightforward, so you may hire an accountant's services.
Tax neutral: if your profits range from £20,000 or less, the variance in taxation between being self-employed and operating as a limited company is minimal.

Employed vs. Self-Employed: What's the Difference?

Let's compare being employed in a limited company and self-employment:

Limited company	Self-employed
This company has a legal entity that is separate from its members	If you are self-employed, you will earn income by contracting directly with the business. This is the simplest business structure in the UK.
In a limited company, you must file tax return with company accounts	When you're self-employed, you will pay your taxes through self-assessment, unlike limited companies where you pay through PAYE
Starting a limited company requires registering with Companies House and appointing a director.	As a sole trader, you register with HMRC through post or online, then file the annual assessment tax return annually by 31st January.
The primary advantage of operating as a limited company is that when your business has financial difficulty, only the business is liable, not the company owners.	The main advantage of self-employment is a straightforward tax filing process and other documentation.
One of the main drawbacks of a limited company is that it involves a lot of admin work, complex rules, and reporting requirements.	In self-employment, there's no legal distinction between you and your business, so you will be held responsible for debts incurred if your company fails.
It's hard to take money from this business structure	You can withdraw company any time you need it.
In a limited company, you'll enjoy tax efficiency since you pay corporation tax on your business profits.	You must pay income tax on your company profits when you're self-employed.
In a limited company, you can withdraw money from your business as dividends if your company is in profit.	Being self-employed, you don't have financial benefits like dividends.

What are Limited Company Tax Responsibilities?

Here are the tax responsibilities of a limited company:

In a limited company, you pay 19% corporation tax on company profits, and the directors pay income tax on earnings they draw from the business.
To take advantage of trading tax benefits in a limited company, you must pay a lower salary and leave the other profit in the business.
This reduces your NIC and PAYE tax liability, and you can still withdraw the additional profit as NIC-free dividends. With this, you maximise the tax profits of your money.

Read this if you will like to know how to file corporate tax for UK companies.

Form Your Company With Incorpuk today

At Incorpuk, we will help you file accurate information when you register your company through us. We will help you with incorporation articles, a registered office address, and all you may need to register your company in the UK. Contact our team if you seek any information; we will gladly assist.

Are you Employed or Self-Employed if You Operate a Limited Company?

Although operating a limited company is not as straightforward as being self-employed as a sole trader, your status as a shareholder or director of your limited is not as complex as it initially appeared. The limited company pays you a salary as a director, and if the company generates more profit, you can still get the money through shareholder dividends.

Stop viewing yourself as the company. Although it's your business, and you might be the sole individual working for it, you're not operating as self-employed. Instead, you're working through the company, a distinct entity with its legal identity.