Key takeaways
- At modest profits the tax difference is small and often cancelled out by extra accountancy costs.
- A company usually pulls ahead once profits are well into the higher-rate band, especially if you don't draw it all out.
- Limited liability, image and future plans (partners, investment, sale) all favour a company.
- Simplicity, low admin and mortgage applications often favour staying a sole trader.
The short version
| Sole trader | Limited company | |
|---|---|---|
| Legal status | You are the business | Separate legal entity |
| Liability | Personal, unlimited | Limited to the company (with exceptions) |
| Tax on profit | Income Tax 20/40/45% + Class 4 NI | Corporation Tax 19–25%, then dividend tax on what you draw |
| Admin | One tax return (plus MTD updates) | Accounts, confirmation statement, CT return, payroll, personal return |
| Image | Fine for most trades | Preferred by larger clients and tenders |
| Setup | Register with HMRC | Companies House, usually within 24 hours |
1. Tax: where the break-even sits
As a sole trader you pay Income Tax at 20%, 40% and 45% on profits above your personal allowance, plus Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% above that.
A limited company pays Corporation Tax at 19% on profits up to £50,000, rising on a sliding scale to 25% above £250,000. You then pay yourself through a small salary plus dividends, and dividends attract their own rates (8.75%, 33.75% and 39.35%) after a £500 tax-free allowance.
Below roughly £30,000 profit the two structures land close together and the company's extra fees can wipe out the saving. Above the higher-rate threshold, particularly if you leave some profit in the business, a company usually comes out ahead. The exact crossover depends on how much you take out, so run it on your real numbers.
2. Liability and risk
As a sole trader, if the business is sued or can't pay its debts, your personal assets are on the line. A limited company separates your personal finances from the business, though directors can still be personally liable in some situations, such as personal guarantees or wrongful trading. If you work in construction, trades or anything with real contract risk, this matters more than the tax.
3. How you're seen
Some clients, especially larger companies and public-sector buyers, prefer or require a limited company. Contracts, tenders and some finance providers treat Ltd status as a sign of an established business. For consumer-facing trades it matters far less.
4. Admin and cost
A sole trader files one Self Assessment return a year, plus Making Tax Digital quarterly updates once in scope. A limited company files annual accounts and a confirmation statement with Companies House, a Corporation Tax return with HMRC, runs payroll for the director's salary, and the director still files a personal return. Accountancy fees are higher as a result. The question is whether the benefits outweigh that cost.
5. Pension, mortgages and future plans
Company pension contributions are a deductible business expense, which makes a company attractive if you're saving seriously for retirement. On the other side, mortgage lenders assess sole traders on profit and directors on salary plus dividends, so the structure can affect what you can borrow. And if you plan to bring in a partner, take on investment or eventually sell, a company is far easier to work with.
How to decide
Stay a sole trader if
- Profits are modest and you take most of it as income
- Your line of work carries low liability risk
- You want the minimum paperwork
- A mortgage application is coming up
Incorporate if
- Profits sit comfortably above the higher-rate threshold
- You can leave some profit in the business
- You want to protect personal assets
- Clients or contracts expect a Ltd company
- You plan to grow, hire, or sell
Frequently asked questions
Can I switch later?
Yes. Moving from sole trader to limited company is common and best done at a sensible point in the year. Going the other way is possible but less straightforward.
Do I need a business bank account as a sole trader?
Not legally, but it makes bookkeeping and MTD compliance far easier. A company must have its own account.
How long does company formation take?
Usually 24 hours at Companies House. Setting up Corporation Tax, PAYE and a business bank account takes a little longer.
Can I keep my trading name?
Usually, as long as nobody has registered it as a company name already. We check this as part of formation.
Want the numbers run for your business?
We'll compare both structures using your actual figures and set up whichever is right for you.