Sole Traders vs Limited Companies

The default and simplest structure is to operate as a sole trader, essentially operating your author business in your personal name. The advantages are that it is very easy to get started with minimal administration and setup costs.

Tax Implications as a Sole Trader:

• You pay income tax personally on all profits from book sales/royalties through Self Assessment tax returns
• Current income tax rates are 20% basic rate, 40% higher rate, 45% additional rate
• You also pay Class 2 and Class 4 National Insurance contributions on profits
• You can deduct allowable business expenses like office costs before paying tax
• Authors can also use Averaging to smooth out large swings in income from year to year.

Alternatively, you can set up a limited company, with you as the director and shareholder. This introduces more administration but can be tax advantageous if making significantly higher profits than you need to utilise each year.

Tax Implications as a Limited Company:

• The company pays 19-25% corporation tax on profits
• You can deduct allowable business expenses before paying tax, care needs to be taken regarding certain types of expenditure as these can cause benefit in kind issues
• If taking dividends, you can only pay these out from post-tax profits
• You pay additional tax personally on dividends received at 8.75% basic rate, 33.75% higher rate, 39.35% additional rate
• You don't pay National Insurance on dividends, but will have to pay national insurance as an employee and the company as an employer
• More tax planning options available regarding mixing dividends and salaries

Overall, operating as a sole trader is simpler and makes sense if your profits are relatively modest. Setting up a limited company can be tax-efficient if your author business generates higher profits annually. Getting professional tax advice before making a change of structure is highly recommended when weighing up the options.