Choosing Your Legal Entity
| Structure | Pros | Cons |
|---|---|---|
| Sole Trader / Freelancer | Lowest setup cost; simple compliance; all profits taxed via Self Assessment | Unlimited liability; less tax planning flexibility; MTD applies once threshold crossed |
| Partnership / LLP | Shared responsibilities; some corporate-law protection (LLP); more structure than sole trader | More complex accounts; profit sharing; administrative burden |
| Limited Company | Limited liability; tax planning options (dividends, salaries); attracts investment easily | More formal governance; higher filing costs; requirements for corporation tax; PAYE for directors |
Making Tax Digital (MTD) Obligations
- As of 6 April 2026, sole traders and landlords with qualifying income over £50,000 must use MTD for Income Tax: quarterly updates, digital records. (gov.uk)
- Thresholds reduce: £30,000 from April 2027; £20,000 from April 2028. (gov.uk)
- Companies must keep digital records too, and any owner who takes income via dividends or salary still faces PAYE and corporation tax obligations.
Tax Planning Strategies for New Entities
- Use of salary + dividend mix in limited companies to reduce National Insurance and income tax.
- Plan ahead for IR35/self-employment vs employee, especially in tech contracts—ensuring contracts reflect real independence.
- Claim R&D tax relief if developing software products or tech innovation.
- Consider Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) for early-stage funding—tax reliefs are valuable but must follow rules on qualifying trades and unconnected investors.
Compliance Essentials
- Register for Corporation Tax within 3 months of starting business if limited company.
- Keep accurate financial records—sales, purchases, expenses. Use accounting software that is MTD-compliant if needed.
- File annual accounts and confirmation statements at Companies House. \n- File Corporation Tax returns, PAYE returns, VAT returns if applicable.
Example
Tech startup “AppNexus Ltd” founded by two software developers:
- They take small salaries to cover personal expenses, and the rest as dividends—this reduces employer NI and avoids higher-band tax where possible.
- They keep digital records via cloud accounting, use quarterly updates under MTD when their income exceeds threshold.
- They claim R&D tax credits for innovation work, and when raising seed investment, use EIS to give investors tax relief.
Bottom line: structuring matters for limited liability and tax efficiency. With MTD thresholds changing, founders need to choose entity type and financial systems that will scale cleanly.