Most barristers operate as sole traders because the Bar Standards Board only allowed barristers to start trading under alternative structures (including limited companies) in 2015.
Tax and National Insurance
As well as offering limited liability status, trading via a limited company can potentially offer tax advantages, but with the current rate of dividend taxation, this isn’t always the case; it will depend on individual circumstances.
As a sole trader, individuals pay income tax at 20/40/45% on their profits regardless of the level of any drawings. In addition, both class 2 and class 4 National Insurance Contributions are payable.
A limited company pays a flat rate of 19% corporation tax on profits. This tax payable by the limited company rather than the shareholder(s) directly.
Income tax is then payable on profits withdrawn from the company. The standard tax efficient approach is to take a low salary (usually up to the National Insurance threshold, and this salary is deductible from the company’s taxable profits thus reducing the corporation tax liability) and take any further profits as dividends. Dividends are subject to a lower rate of income tax, with the first £2,000 of dividends per year being taxed at a zero rate, then the remainder being taxed at 7.5/32.5/38.1% depending on whether they fall within the basic, higher or additional rate bands (as opposed to 20/40/45%).
Other Considerations
Below we list some other other pros and cons of setting up a limited company for barristers:
Pros
Operating as a limited company offers limited liability to the owners; the risk sits with the company rather than the individual shareholder(s)
Trading as a limited company can offer more flexibility when it comes to profit extraction; profits can be retained so that the dividends are taken up to a certain tax bracket, or spouses can potentially own shares in limited companies which can sometimes be useful when looking at taking advantage of lower tax rates
Cons
It generally costs more in accountancy and admin fees to trade as a limited company
There are also expenses involved in setting a company up, such as getting advice on the best structure, and having to apply to the Bar Standards Board with a fee in order to trade through a limited company
In some circumstances it can actually be less tax efficient to operate as a limited company, so care should be taken and advice sought before going ahead
Limited companies can’t use cash basis accounting, whereas sole traders can use the cash basis, as well as claiming HMRC approved flat rate expenses
The above provides a very brief outline of the main pros and cons of operating through a limited company, but there are a number of other considerations, and advice should be sought to determine whether operating through a company is beneficial in individual circumstances.
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Please contact us to find out how the above applies in your circumstances, how you can reduce your tax liabilities and maximise your tax efficiency.
Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.
