It's the question almost every new business owner asks: should I trade as a sole trader, or set up a limited company? The honest answer is 'it depends' — but the factors that drive the decision are usually the same.
Here's a side-by-side look at how each option actually works, and when it makes sense to switch.
Sole trader — the basics
A sole trader is the simplest business structure: you and the business are legally the same thing. You keep all the profits after tax, and you're personally liable for any debts.
- Register with HMRC for Self Assessment.
- Pay Income Tax on your profits at your usual rates (20%, 40%, 45%).
- Pay Class 2 and Class 4 National Insurance.
- File one Self Assessment return a year (plus quarterly MTD updates from April 2026 if your income exceeds £50k).
- No filings at Companies House — your accounts are private.
Limited company — the basics
A limited company is a separate legal entity. The company earns the income, pays Corporation Tax on its profits, and you take money out as a director either through a salary or as dividends.
- Register at Companies House (about £50 and 24 hours).
- Pay Corporation Tax on profits (19%–25% depending on profit level).
- Take a salary through PAYE and/or dividends from post-tax profit.
- File annual accounts and a confirmation statement at Companies House (these become public).
- File a Corporation Tax return (CT600) plus your own Self Assessment.
When a limited company usually wins
- Profits comfortably above the higher-rate Income Tax threshold — the Corporation Tax + dividend combination is often more efficient than sole-trader Income Tax.
- You want to limit personal liability (e.g. you're signing big contracts or carrying business risk).
- You're looking for outside investment — investors generally need shares to buy.
- You want to retain profits inside the business to fund growth, rather than drawing them all out personally.
- Clients prefer (or require) to deal with a limited company.
When sole trader usually wins
- You're testing an idea or starting small — minimal admin, no Companies House filings.
- Profits are modest (broadly under £30k–£40k a year).
- You value privacy — sole-trader accounts aren't public.
- You don't want the cost or complexity of running a company alongside your own tax affairs.
Switching later
You can start as a sole trader and incorporate later — many businesses do exactly that. There are some tax reliefs (incorporation relief) that can make the transition very efficient if it's planned properly. Going the other way is rarer but possible.
The key is not to leave it too long. Once profits push you well into higher-rate tax, the savings from incorporating add up quickly.
Need a hand deciding?
We've helped hundreds of new businesses pick the right structure — and helped plenty more switch when the time was right. Get in touch for a no-pressure chat about your numbers.
Frequently asked questions
- Can I pay myself less tax as a limited company?
- Often yes, particularly once profits exceed the higher-rate threshold. The combination of a small salary, dividends and Corporation Tax is usually more efficient than paying Income Tax + Class 4 NIC as a sole trader — but the gap has narrowed in recent years.
- How much does it cost to run a limited company?
- Around £50 to set up at Companies House, plus accountancy fees (typically £600–£1,500 a year for a small company including accounts, CT600 and confirmation statement). Sole traders are cheaper to run but the gap is smaller than people think.
- Will my home and personal assets be at risk as a sole trader?
- Yes — sole traders have unlimited personal liability for business debts. A limited company creates a legal separation, although directors' guarantees and personal liability for negligence can still apply in some cases.
Need help with your tax affairs?
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