Incorporating your business limits your personal liability because the company is treated as a separate legal entity. Your risk is limited to the amount of share capital you pay into the company (which in some cases can be as little as £1). By doing this you protect your personal assets in the event of the company running into trouble.
The second reason to consider incorporation is to save tax. Under traditional self-employment you normally pay income tax at either 20% or 40% depending on your profit level. You also pay national insurance which is an additional 9% charge on your profits. Trading through a company can lead to substantial tax savings once profits reach a certain level. A company will pay corporation tax at 20% on all its profits. You can utilise your tax free personal allowance by having a minimal director’s salary ensuring you retain entitlement to state pension and other benefits. Any additional monies you draw can be treated as dividends. The real benefit here is that you only pay personal tax on dividends once these earnings go into the higher rate tax threshold. Also there is no national insurance applied to dividends. Good tax planning through a limited company could save you a substantial amount of tax.
Before you rush to incorporate there are some other things you should consider. The accounts filed will be available for the public to view on Companies House. The level of compliance is also slightly higher as you will need to file an annual return, annual accounts and a corporation tax return each year. Overall most businesses can benefit in some way from incorporation. Other reasons to incorporate include the potential to generate goodwill and the enhanced status and reputation the word ‘limited’ can bring to your business.