How to set up a limited company, and when it saves you tax
What it is, how to set one up this week, and the honest profit level where it starts saving you money instead of adding paperwork.
Structure6 min readSole traders and freelancers earning enough that tax has started to sting.
The short answer
- A limited company is a separate legal person. It earns the money, pays its own tax, and owes its own debts, not you.
- You pay yourself a mix of salary and dividends, which is usually cheaper than one large wage.
- Below a modest profit it costs more in admin than it saves. Above that line it can save thousands a year.
UK setup cost
From £50
Companies House, same day
UK corporation tax
19% to 25%
Against up to 45% income tax
Where it shines
Profit you keep in
Money left in is taxed once, gently
Do it in this order
- 1Choose a name that is free, and a registered address. Your home is fine but it is public.
- 2Register the company: Companies House in the UK, your state in the US, ASIC in Australia.
- 3Open a business bank account in the company's name. The money is the company's, not yours, from day one.
- 4Register for the taxes: corporation tax, payroll if you take a salary, VAT or GST over the threshold.
- 5Set a small salary, then take the rest as dividends. The salary keeps your state pension and benefits record going.
- 6Keep every receipt. A company lives or dies on its records, and sloppy books are what turn a tax saving into a tax problem.
Only if you want the detail
Where the saving actually comes from
As a sole trader, every pound or dollar of profit is taxed as your income, at up to 45% in the UK plus National Insurance.
The mix that most owners use
A small salary plus dividends beats either one alone, in all three countries.
What it costs to run, honestly
The fee sites quote is the setup. The real cost is the yearly running.
When to stay a sole trader
If your profit is modest and you spend everything you earn, a company adds cost without saving tax.
What people get told, and what is true
A company always pays less tax.
Only when profit is high enough, and only if you leave some in the company or take it out tax efficiently. Below that line it is just extra admin.
The company's money is my money.
Legally it is not. Taking it informally creates loans that carry their own tax charge.
Now do it on your numbers
Reading is the easy half. The saving comes from applying this to your income, your country and this tax year, with the deadline written down.
Where this comes from
General guidance, not personal advice. Anything involving a company, a trust or another country should be checked by a qualified accountant or tax adviser before you act.
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