Plumbing and heating engineers are continuing to reap the rewards of a rapidly growing market. With the boom of housebuilding, alongside consumer interest in improving household efficiencies due to the rising cost of living, their trades remain in ultra-high demand. 

With average wages rising in line with this, there’s little wonder that so many tradespeople working in plumbing and heating are either self-employed, or considering starting their own business soon.

This is commonplace in the trades sector, with around half of the UK’s 700,000 construction workers already registered as being self-employed.  

However, the decision is one that must be made on an individual basis, after consideration of a number of important factors, including: 

• The right company trading type 
• What they can be liable for 
• Impact on personal life and work/life balance.

The way in which you register your business can also impact tax, take-home pay, legal responsibilities, and personal finances, so knowing the facts before making a final decision is vital.

Registering as a sole trader

If you:

• Are not sure how profitable your business will be
• Not sure if being self-employed/contracting is for you long-term
• Prefer simplicity and are not a fan of lots of admin
• Think you may need to live on all of your profits in the early days
• Are usually/likely to be a basic rate taxpayer

Then setting up as a sole trader may be your preferred option. It is simple to set up – and close, if needed – and doesn’t need a separate business bank account. 
The key responsibility of a sole trader is to keep records of your income and expenses for the period, and then file a Self-Assessment Tax Return (SATR) annually, to calculate the income you earned and the taxes you owe in the year. 

Once the SATR has been submitted to HMRC, you simply pay the tax liabilities at the required time. 

As a sole trader, you will pay income tax on profit earned, irrelevant of whether you had drawn all the profit earned in the tax year, and will also pay Class 2 and Class 4 NI contributions. 

However, if you earn around the basic rate tax threshold (£50,270 in 22/23) or below, then being a sole trader may still be more tax-efficient for you than a limited company, as there is no additional company tax to pay.

Registering as a limited company

If you:

• Are usually a higher rate taxpayer
• Are looking to grow the business and maybe take on employees in the future
• Are fine with your business details being available on public record with Companies House
• Don’t need, or want, to withdraw all the money you earn through the company in a year
• Are looking for short and long-term tax efficiencies with any surplus profit

A limited company set up may be your preference. It offers more opportunities for growth, tax planning, and can also offer more commercial credibility in the market, especially as many agencies, for example, will not work with sole traders. 

If you opt to register as a limited company, it’s important to remember there is a double bite of tax from Corporation Tax at the current rate of 19% (rising to 25% in April 2023), and further personal income/dividend tax when you withdraw the funds. 

However, for higher earners, this shouldn’t deter you as there is more scope to be compliantly tax-efficient, and a limited company setup generally provides a better return, as your profit rises over the higher rate tax bracket.

A good starting point when it comes to deciding whether to register as a sole trader or limited company is looking at the amount you expect to earn and the tax you’ll reasonably pay on it, as well as the other considerations discussed within this article. 

Registering for the Construction Industry Scheme 

If you’re self-employed and your business pays sub-contractors, you’ll need to register to the Construction Industry Scheme (CIS). Developed and enforced by HMRC, the CIS intends to protect construction workers from false employment and minimise tax evasion within the industry. 

To become CIS-registered, contractors will need to register online and deduct money from their sub-contractors’ payments before passing this on to HMRC. 

These deductions act as advance payments towards the sub-contractors’ tax and National Insurance payments, meaning when the sub-contractor submits their SATR, these payments will count towards it. If the deductions account for more than the total due to HMRC, the CIS-registered worker will receive a refund. 

Contractors must register for the scheme, but sub-contractors do have a choice whether to register or not. 

You’re classed as a contractor if you: 

• Pay sub-contractors for construction work 
• Your business does not deliver construction work, but you spent more than £3 million on construction in the last 12 months since you made your first payment.
• If you are the person delivering the construction work for the contractor, you are therefore classed as a sub-contractor. 

Registering for the CIS is an effective way for sub-contractors to have more control over their cashflow. Deductions taken under CIS typically equate to around 20% of the total payment, but for those who have not opted into the scheme, these deductions will be taken at a higher rate. 

If you’ve made the decision between sole trader and limited company, and decided whether you become CIS-registered, you’re on the right path to getting your plumbing and heating business off the ground.

Next, it’s advisable to research and develop a business plan, find funding options, and put in a significant amount of hours to succeed in your career on your own terms. 

Seek the advice of a qualified accountant if you need support in deciding what is the right option. Once you’re settled on the ideal trading type for you, you’ll reap the rewards by avoiding tax complications further down the line.