Sole Trader vs Limited Company: Which Is Right for You?

What Is a Sole Trader?

A sole trader is the simplest way to run a business in the UK. You register with HMRC, trade under your own name (or a business name), and report your income and expenses through Self Assessment each year. That's essentially it.

As a sole trader, you and your business are legally the same entity. There's no separation between your personal finances and your business finances in the eyes of the law. This means the setup is simple and the admin is minimal — but it also means you're personally responsible for any debts the business runs up.

Sole trader is the most common structure for freelancers, tradespeople, consultants and anyone just starting out. It's quick to set up (you can register online with HMRC in about 10 minutes), costs nothing, and requires very little ongoing paperwork.

What Is a Limited Company?

A limited company is a separate legal entity from you as an individual. It has its own name, its own bank account, its own tax obligations, and its own legal identity. You are a director (and usually a shareholder) of the company — but you are not the company itself.

You register a limited company with Companies House, which takes a day or two and costs £50 (as of 2026). Once registered, the company files its own accounts and Corporation Tax return each year, separate from your personal tax return.

The "limited" in limited company refers to limited liability — meaning your personal assets (your home, savings, car) are generally protected if the business runs into financial difficulty. The company's debts are the company's problem, not yours personally, unless you've personally guaranteed them.

How Tax Works for Each Structure

Sole Trader Tax

As a sole trader, your profit is treated as personal income. You pay Income Tax on it at 20%, 40% or 45% depending on how much you earn, plus Class 4 National Insurance (currently 6% on profits between £12,570 and £50,270, and 2% above that). You also pay Class 2 NI, though this is being phased out.

You report everything through Self Assessment, which you file once a year by 31 January. If your turnover exceeds £90,000 (the current VAT threshold), you'll also need to register for VAT.

Limited Company Tax

A limited company pays Corporation Tax on its profits — currently 19% for profits up to £50,000, rising to 25% for profits above £250,000, with marginal relief in between. As a director, you typically pay yourself a combination of salary and dividends.

Dividends are taxed at lower rates than salary (8.75% for basic rate taxpayers in 2026/27), which is why many people assume a limited company always saves tax. But this isn't always true — especially at lower profit levels, once you factor in the additional accountancy costs and admin involved.

Side-by-Side Comparison

When Sole Trader Makes Sense

Sole trader is usually the right choice when you're just starting out, your income is modest, or you want to keep things simple. Specifically, consider staying as a sole trader if:

• Your annual profit is below roughly £30,000–£35,000
• You're testing a business idea and don't want the overhead of a company
• You work alone and have no employees
• Your clients don't require you to trade as a limited company
• You want minimal admin and are happy to do your own tax return

When a Limited Company Makes Sense

A limited company starts to make more sense as your income grows or your circumstances change. Consider incorporating if:

• Your profit is consistently above £35,000–£40,000 and you don't need to draw all of it
• You want to protect your personal assets from business risk
• You're taking on employees or significant contracts
• Your clients (especially larger businesses or public sector) require it
• You want to bring in investors or sell the business one day
• You're planning to make significant pension contributions

The Myth That Limited Company Always Saves Tax

This is one of the most persistent misconceptions in small business. Yes, at higher profit levels, the combination of Corporation Tax and dividend tax can be lower than Income Tax and NI. But the calculation isn't straightforward.

First, you need to factor in the cost of running a limited company. A decent accountant for a limited company typically costs £800–£2,000 per year, compared to £200–£500 for a sole trader. That difference alone can wipe out any tax saving at lower profit levels.

Second, the tax saving only applies to profits you leave in the company. If you need to draw everything out to live on, the advantage shrinks considerably.

The honest answer is: get a proper calculation done by an accountant before you decide. The breakeven point varies depending on your personal circumstances, how much you draw, and what other income you have.

Can You Change Later?

Yes — and many people do. Starting as a sole trader and incorporating later is a very common path. You can incorporate at any point by registering a new limited company with Companies House and transferring your business activities to it.

There are some tax considerations when you transfer assets from a sole trader business to a limited company (particularly around goodwill and Capital Gains Tax), so it's worth getting advice when you make the switch. But the process itself is straightforward.

The key message: don't let the fear of choosing the "wrong" structure stop you from starting. Sole trader is a perfectly legitimate and tax-efficient way to run a business, especially in the early years. You can always change when the time is right.