As a crypto investor in the UK, your tax obligations can vary depending on how you structure your business. Most individuals start as sole traders, managing their crypto transactions under personal self-assessment. However, as your portfolio grows, restructuring as a limited company may offer potential tax benefits and better financial management.
Sole Trader vs. Limited Company: a tax comparison
Before diving into tax differences, let’s define these two structures and outline their pros and cons.
What is a Sole Trader?
A sole trader is an individual who runs their own business and is personally responsible for its debts and taxes. This is a simple structure, often used by small business owners and individual crypto investors.
Pros:
- Easy and inexpensive to set up.
- Simple process for beginners.
- You have complete control over the business.
- Direct reporting of personal crypto gains and losses.
- Fewer accounting and regulatory requirements.
- All profits after tax are yours to keep.
- Suitable for small-scale investors or those who HODL.
Cons:
- Income tax rates can be higher than corporation tax.
- Limited options for tax deferral and less flexibility managing tax liability.
- Limited expense deductions and tax optimisation.
- You’re personally responsible for any business debts.
- Potentially higher National Insurance contributions.
Take a look through our UK crypto tax guide where we breakdown the tax rules and rates for individuals participating in crypto.
What is a Limited Company?
A limited company is a legal entity separate from its owners. This structure is common for businesses that generate more revenue or are seeking tax efficiencies.
Pros:
- Corporation tax rates (typically 19%) can be lower than income tax.
- Extensive expense deductions.
- Greater flexibility in tax deferral and planning.
- Flexibility to pay yourself in dividends, which may be taxed at a lower rate.
- You are not personally responsible for the company's debts (limited liability).
- Easier to reinvest profits back into the business for growth.
- Potentially lower overall tax liability for active traders and large portfolios.
Cons:
- More complex and expensive setup and maintenance.
- Additional administrative responsibilities.
- Stricter regulatory and accounting requirements.
- Costs associated with company formation and ongoing compliance.
Profits are taxed twice: first through corporation tax, then through dividend or salary tax.
Benefits of switching to a Limited Company for crypto investors
Self Assessment is normally the most viable option for the majority of crypto investors with low tax liability, because it’s simple and you can stay on top of tax compliance yourself or with some support from an accountant. As your crypto investments pick up and you start earning more, you may find that filing as a limited company instead of an individual could offer significant tax benefits.
1. Lower taxes
Personal income tax rates vs corporation tax: As a sole trader, your income is subject to personal income tax rates, via the self assessment tax return, which can reach up to 45% for higher earners. In contrast, a limited company pays corporation tax, currently at a flat rate of 19%. This can result in significant savings for higher-income crypto traders.
Expense deductions: Companies can deduct a wider range of expenses, reducing the taxable profit. This includes costs related to trading, mining expenses, software subscriptions (like Recap), and professional fees.
Deferred tax payments: Companies typically have more flexibility in deferring tax payments, which can improve cash flow management.
2. Not personally responsible
One of the biggest advantages of a limited company is limited liability, meaning your personal assets are protected if your business incurs debts or legal liabilities. This is particularly important for investors handling large sums of crypto assets, where the market’s volatility can increase financial risk.
3. Pay yourself in dividends
Limited companies offer more flexibility in how you receive your income. Instead of taking a salary (which is subject to personal income tax), you can pay yourself in dividends, which are often taxed at a lower rate, giving you more control over your tax bill.
The tax rate can significantly reduce your overall tax burden, however, you will still need to account for personal taxes on any salary or dividends you receive from the company.
How to transition from Sole Trader to Limited Company
There’s two stages to go through when restructuring your tax affairs from filing as an individual to a limited company. First, you’ll need to de-register for self assessment and secondly, structure yourself as a limited company. Depending on the complexity of your circumstances and assets it can be a difficult process so we highly recommend getting in touch with a tax professional or accountant who can manage the transition for you and also provide advice on the best approach and time to switch. Below we run through a few of the key steps involved:
De-Registering from Self-Assessment
As a sole trader, you are required to submit a self-assessment tax return. However, if you decide to switch to a limited company, you will need to de-register for self-assessment to avoid being taxed as an individual for your crypto gains. Here’s how:
- Notify HMRC: that you are ceasing to be a sole trader. This can be done online, you’ll need your National Insurance Number and Unique Taxpayer Reference (UTR). Ensure you provide the exact date you stopped being self-employed, to correctly determine your tax obligations and ensure that HMRC updates your records and adjusts any future tax requirements accordingly.
- Submit your final self-assessment: You’ll need to complete a final self-assessment tax return and ensure all taxes are settled for the period up to the date you stop trading as an individual. This is done in the same manner as in previous years, detailing your total income minus any allowable expenses to calculate your total profit. Additionally, you may also be able to reduce your tax liability by claiming specific reliefs such as overlap relief.
- Transferring business assets: you will need to ‘sell’ any assets that you wish to transfer to your new company. This can be done through a Director’s Loan, which allows the company to reimburse you for the value of the assets over time. Be mindful that this transfer will impact your capital allowances and could trigger Capital Gains Tax. It is advisable to consult with an accountant to handle this process correctly, ensuring that all tax implications are considered and managed efficiently.
Structuring as a Limited Company
- Register with Companies House: This can be done online and involves submitting details about your business, including a company name and office address.
- Corporation tax registration: Once your company is set up, register for corporation tax with HMRC. You’ll be responsible for paying tax on your profits and filing a company tax return.
- Set up business accounts: Open a separate business bank account and manage your crypto portfolio through this account to keep your personal and business finances separate.
You can refer to our Guide for setting up a UK limited company for a more detailed step by step process.
Get professional help when restructuring your tax affairs
Restructuring your tax affairs is a big decision and actually transitioning from sole trader to limited company can be complex. A qualified accountant can assess your situation and advise you based on your circumstances as well as help you navigate the process, ensuring compliance with all legal requirements and on-going tax compliance.
How Recap can help
Switching to a limited company can make your tax situation more complex, but tools like Recap can help you track and manage your crypto transactions, ensuring you calculate taxes accurately. Recap allows you to:
- Track the fair market value (FMV) of your crypto assets.
- Monitor your capital gains and report transactions.
- Generate reports for HMRC, ensuring your limited company stays compliant.
Conclusion: is structuring as a limited company right for you?
While switching to a limited company can offer clear benefits, such as lower corporate tax rates and greater flexibility in tax planning, it’s not always the right fit for everyone.
Is structuring as a limited company better for your crypto investments? Your decision should depend on factors such as the size of your crypto portfolio, your tax bracket, and your long-term goals.
Are you prepared to restructure as a limited company? You need to consider whether you're ready for the added administrative responsibilities of running a limited company - more complex record-keeping, meeting filing deadlines, and additional compliance with legal and tax obligations.
Ultimately, the answer depends on your personal circumstances, and we encourage you to consider all aspects before making the switch. It's wise to consult with an accountant who can assess your situation and provide tailored advice, ensuring you're making the best decision for your business and tax strategy. Check out our accountant partners page if you're looking for a UK crypto tax specialist.