Is it better to be self-employed or have a limited company as an influencer?

For many, their social media channels are just a hobby, but the industry is becoming much more viable as a full-time profession. When it becomes your full-time job and you start making money from your social media platforms, you are required to register your business for tax.

You are then considered a self-employed sole trader. As your income increases, it could be more beneficial to register as a limited company.

For social media influencers, being a self-employed sole trader or a limited company are both feasible business structures. There are pros and cons to both, and each comes with its own tax obligations and administrative duties.

Question is, what is the best structure for social media influencer?

What route you choose to go down is largely dependent on your income, but can be influenced by other factors, such as the level of risk involved in your work, or whether forming a partnership is an option.

We've put together this guide to help, but feel free to get in touch with Capture Accounting for more advice on accounting for influencers and to enquire about our services.

What is a sole trader?

Self-employed sole traders are required to complete a self assessment tax return to HMRC, detailing their total income, minus expenses. That figure is considered profit, on which tax is owed.

Any small business is entitled to claim expenses on their earnings. There are no specific guidelines for online influencers as to what expenses are tax deductible, but broadly speaking, it's any cost that you incur in the course of doing your work. 

Read our helpful guide on expenses for social media influencers here.

It can all sound a bit daunting if you're new to tax, so it can be very reassuring to get someone to help you, like a specialist accountant ;-)

What is a limited company?

A limited company is a separate legal entity that can exist in its own right. What that means is that it pays tax on the profits it makes and can enter into contracts in its own name.

Although you are the owner, it is the company that enters into contracts and subject to tax on it profits.

If you want to then take money out of the company you can do so via a salary to yourself or dividends - which is basically another word for the owners of the company paying themselves the profits (after tax) from the company.

Do social media influencers need to register as a business?

As a sole trader, you do not need to register with Companies House. However, once you start to earn money from your activities you will need to submit a self-assessment tax return to HMRC at the end of the tax year to declare your earnings.

You should register for self-assessment once your income reaches £1,000. You will only start to pay taxes once your earnings exceed the personal allowance, which is currently £12,570 (tax year 2022-23).

While, it's not mandatory for a social media influencer to create/register a limited company, in the right circumstances there are many benefits of doing so. If you decide to go down that route, then you will be required to register with Companies House and submit your annual accounts.

You will also be required to complete an annual Corporation Tax Return to HMRC.

Self-employed influencer vs. limited company influencer - key differences

Both structures have their own tax treatment, rules and regulations. The key differences basically boil down to; how much tax you pay, your personal liability for any debts/legal action and the level of administration required.

Let's look at each of them in turn and the pros and cons of both methods.

Self-employment (sole traders)

Sole traders pay tax on their profits, whether they withdraw that money from the business or not. Your profits are worked out by taking the income you earn, eg. from your sponsorship deals, Youtube channel, social media posts, digital products etc., then deducting any allowable expenses you have incurred.

Pros:

• Simplicity. The layout and structure of the business is simple and easy to manage, with minimal administration.
  
  
• Freedom. You can call your business whatever you want but, effectively, the business is you.

Cons:

• Bigger tax bill. As your profit increases, it can lead to you paying a lot more income tax and national insurance compared to a limited company.
  
  
• No prestige factor. Being a sole trader can sometimes give the perception that you are still a "small timer" which could possibly limit your opportunities.
  
  
• Personal liability. As you are the business, you will be personally liable for any debts it incurs or any legal action taken. Even your personal belongings such as your car or home can be used to pay the debt.

Limited companies

Limited companies pay tax on their own profits. If you don't withdraw those profits, you don't have to pay any more tax. The main benefit of this is that you can re-invest the money into the business, on equipment for example, and not pay additional tax on drawing out those funds.

Pros:

• More tax efficient. There are several tax benefits of running your business through a company which greatly reduce your income tax and national insurance.
  
  
• Prestige factor. Running your business through a limited company can elevate your brand and give the impression that you are serious and professional, which may open doors for you.
  
  
• Limited liability. As limited companies are a separate entity from the owners, any failures from debt/being sued are only liable to the company itself, not the person.
  
  
• Free withdrawals. You can choose when and how much money you want to withdraw from the company, allowing you to choose how much income tax you want to pay each year.

Cons:

• Complexity. A limited company structure is a little more complex than being self-employed and comes with more administration, director and compliance duties. However, an experienced accountant such as Capture can easily handle this for you.

When should I form a limited company as an influencer?

You should consider forming a limited company when it becomes tax efficient to do so. Once your income reaches £50,271+ (just over £4k a month) you will enter a higher tax band. Then it will usually be more tax efficient to become a limited company.

You also may consider registering if you have a partner/spouse that can get involved with running the business. They can take a salary and share profits to reduce your taxable income.

Another compelling reason to register your business is if you are signing deals that involve some level of risk on your part, such as to promote brands/products.

For more advice on tax efficiency, read this blog.

Which business structure is best for me?

Just as all online influencers have a unique presence, so do their finances. We've outlined some guidance here on when you should consider registering, but each case should be considered on its merits, taking into account your personal situation, your income and future ambitions.

Capture Accounting are a specialist accountant for influencers, and we're happy to have a quick 20min chat with you to see which structure would be best for you. We are specialist accountants and put the needs of our clients first in all we do.

We have your best interests at heart and we will ensure you keep more of what you earn!

Conclusion

Converting your business into a limited company may seem a little daunting at first but there are so many advantages to doing so, such as limiting your personal liability and paying less tax.

With the help of a specialist accountant like Capture guiding you through the whole process, you'll look back and wonder why you didn't do it sooner!