Sole Trader vs Limited Company

Last checked: 12 November 2026, using 2026 to 2027 tax rates published by HMRC after the Autumn Budget on 28 October 2026. Figures apply to England, Wales and Northern Ireland; Scottish Income Tax rates differ.

Sole trader or limited company is the first big decision most new UK businesses face, and the one people most often get wrong for the wrong reason. The usual advice is “go limited to save tax”. After the dividend tax rise in April 2026, that is no longer true for most people who take all their profit out of the business.

This guide compares the two on tax and take-home pay, risk, admin and cost, with worked examples, then helps you decide and explains how to switch later.

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The quick answer

• Start as a sole trader if you’re testing an idea, your work carries little financial risk, or you’ll spend most of what the business earns. It’s the simplest and cheapest way to trade, and you can incorporate later.
• Choose a limited company if you need to protect your personal assets, your clients or agencies require it, you want investors or co-owners, or you’ll earn more than you need and can leave profit in the company.
• On tax alone, a sole trader now keeps slightly more than a company director who takes everything out, at most profit levels. The company only wins when you leave money in it, pay into a pension through it, or share ownership with a spouse or partner.

At a glance

	Sole trader	Limited company
What it is	You and the business are legally the same	A separate legal entity that you own and direct
Set-up	Register for Self Assessment with HMRC. Free	Register with Companies House. £100 online, plus identity verification for directors
Liability	Unlimited: your personal assets are at risk	Limited to what you put into the company, with exceptions
Tax on profits	Income Tax and Class 4 National Insurance on all profit	Corporation Tax on profit, then personal tax on the salary and dividends you take
Taking money out	It’s your money as soon as it’s earned	Salary, dividends or pension contributions; the company’s money isn’t yours until then
Yearly filing	Self Assessment tax return	Company accounts, Corporation Tax return, confirmation statement (£50), payroll if you take a salary, plus your own Self Assessment
Making Tax Digital for Income Tax	Yes, once turnover passes the threshold	Doesn’t apply to the company
Privacy	Nothing published	Directors, owners and accounts are on the public register
Typical accountancy cost	Lower; many sole traders do it themselves	Higher; most directors use an accountant

How each is taxed in 2026 to 2027

Sole trader

You pay tax on your profit (sales minus allowable expenses), whether or not you take the money out of the business.

• Income Tax: 0% on the first £12,570, 20% up to £50,270, 40% up to £125,140 and 45% above that.
• Class 4 National Insurance: 6% on profit between £12,570 and £50,270, and 2% above.
• Class 2 National Insurance: nothing to pay if your profit is above £7,105, and you still build up State Pension entitlement. Below that, you can pay £3.65 a week voluntarily.

Limited company

The company pays tax on its profit first. You then pay personal tax on what you take out.

• Corporation Tax: 19% on profits up to £50,000 and 25% above £250,000. In between, marginal relief applies, which works out at 26.5% on each pound of profit over £50,000.
• Salary: a deductible cost for the company. The company pays employer’s National Insurance at 15% on salary above £5,000 a year. A company where the director is the only employee can’t claim the Employment Allowance.
• Dividends: paid from profit after Corporation Tax. The first £500 is tax free, then you pay 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% above £125,140. Dividend rates rose by two percentage points in April 2026.

Take-home pay compared

Here’s what one person keeps from the same profit under each structure in 2026 to 2027. The company figures assume a single director who takes a salary of £12,570 and pays out all the remaining profit as dividends.

Profit before tax	Sole trader keeps	Company director keeps	Difference
£30,000	£25,470	£24,400	Sole trader ahead by about £1,070
£50,000	£40,270	£38,860	Sole trader ahead by about £1,410
£60,000	£46,110	£46,090	About level
£80,000	£57,710	£55,770	Sole trader ahead by about £1,950

Add the extra accountancy and filing costs of a company and the gap widens. For someone who needs to take out everything the business earns, incorporating purely to save tax no longer adds up.

When a company does save tax

• You leave profit in the business. A sole trader with profit above £50,270 pays 42% (Income Tax plus National Insurance) on every extra pound, whether they spend it or not. Profit kept in a company is taxed only at Corporation Tax rates, from 19% to 26.5% at these levels, until you take it out. That suits people building a cash reserve, investing in equipment or smoothing income between good and bad years.
• You make pension contributions through the company. Employer contributions are normally a deductible cost and aren’t hit by dividend tax or National Insurance.
• You share ownership. If a spouse or civil partner genuinely owns shares, dividends can use two sets of allowances and basic rate bands. Take advice first, because HMRC has rules on this.

Risk and liability

As a sole trader, there’s no legal line between you and the business. If it can’t pay a debt or loses a legal claim, your savings and home can be at risk.

A limited company is responsible for its own debts, so your loss is normally limited to what you’ve invested. That protection has limits:

• Banks and landlords often ask directors of small companies for a personal guarantee, which puts you back on the hook for that debt.
• Directors can be personally liable for wrongful or fraudulent trading, and for some unpaid taxes.
• It doesn’t replace insurance. Professional indemnity and public liability cover matter under either structure.

If your work involves large contracts, premises, stock on credit, employees or a real chance of being sued, limited liability is a strong reason to incorporate, whatever the tax position.

Admin, deadlines and costs

Sole trader

• Register for Self Assessment by 5 October after the end of the tax year in which you started trading, if you earned more than £1,000 from self-employment.
• Keep records of sales and expenses, and file one tax return a year by 31 January.
• If your turnover is over the threshold, follow Making Tax Digital for Income Tax: digital records and quarterly updates. It applies above £50,000 now, £30,000 from April 2027 and £20,000 from April 2028.

Limited company

• Register the company (£100 online). Directors and people with significant control must verify their identity with Companies House.
• File annual accounts with Companies House, and a Company Tax Return with HMRC. Pay Corporation Tax nine months and one day after your year end.
• File a confirmation statement every year (£50 online).
• Run payroll if you pay yourself a salary, and keep records of dividends and board decisions.
• Open a business bank account. A company needs its own; mixing company and personal money causes tax problems.
• File your own Self Assessment return for your salary and dividends.

Under both structures you must register for VAT once your taxable turnover passes £90,000 in any 12 months.

Good accounting software cuts the work either way. See our guides to the best accounting software for UK sole traders and Xero vs QuickBooks vs FreeAgent, which covers limited company plans.

Other things to weigh up

• Clients and contracts. Some larger clients and most recruitment agencies will only deal with limited companies. If you contract through a company, the off-payroll working rules (IR35) may apply.
• Privacy. A company’s registered office, directors, owners and accounts are public. Sole traders publish nothing.
• Your business name. Registering a company stops anyone else registering the same company name. A sole trader’s name has no such protection, though a trade mark protects either.
• Mortgages and borrowing. Lenders assess directors and sole traders differently. If you plan to keep profit in a company and pay yourself little, check with a mortgage broker how that income will be treated.
• Investment and exit. You can sell shares in a company or bring in co-owners. A sole trader business can only sell its assets.
• Losses. A sole trader’s early losses can often be set against other income, such as a salary from a job. A company’s losses stay in the company.

Which should you choose?

• Side hustle or testing an idea: sole trader.
• Freelancer who spends most of what they earn: sole trader, unless clients insist on a company.
• Contractor working through agencies: usually a limited company, because it’s expected.
• Profit well above what you need to live on: a limited company, so you can keep the surplus in the business at lower tax rates.
• Higher-risk work, premises, staff or stock on credit: a limited company, for the liability protection.
• Two or more owners, or planning to raise investment: a limited company.

If you’re near the line, an hour with an accountant is worth the money. Ask them to run your own numbers, including pension contributions and any other income.

Switching from sole trader to limited company

You can start as a sole trader and incorporate when the business justifies it. Many businesses do.

1. Register the company with Companies House and verify your identity.
2. Open a company bank account and move your trading into it from a clear start date.
3. Transfer the business: assets, contracts, insurance, your website and any VAT registration. Tell your clients and update your invoices.
4. Register for PAYE if you’ll take a salary.
5. Close the sole trader business with HMRC and file a final Self Assessment return covering the period up to the switch.
6. Get advice on the transfer itself. Moving assets or goodwill into a company can have tax consequences.

Frequently asked questions

At what profit should I switch to a limited company?

There’s no longer a simple figure. On 2026 to 2027 rates, a director who takes all the profit out keeps no more than a sole trader at any of the profit levels we tested. The case for a company depends on how much profit you can leave in it, and on liability and client requirements.

Is it cheaper to be a sole trader?

To run, yes. There’s no registration fee, no annual Companies House fees and less to file, so accountancy costs are lower.

Can I be employed and a sole trader at the same time?

Yes. Your self-employed profit is added to your salary to work out your tax, so some or all of it may be taxed at the higher rate.

Does Making Tax Digital apply to limited companies?

Making Tax Digital for Income Tax doesn’t, because companies pay Corporation Tax. Making Tax Digital for VAT applies to any VAT-registered business, whatever its structure.

Do I need an accountant for a limited company?

It isn’t a legal requirement, but most directors use one. Company accounts and the Corporation Tax return are more involved than a sole trader’s tax return, and mistakes are costly.

Can I go back to being a sole trader?

Yes. You can close the company and trade in your own name, but taking the remaining money out of the company has tax consequences, so plan it with an accountant.

Next steps

Going sole trader? Read our guide to Making Tax Digital for sole traders and choose your accounting software. For more on setting up, browse our start a business guides.

Just starting out? Get our free UK Startup Toolkit: a 40-step startup checklist, a startup costs calculator and 50 AI prompts, plus one practical tip every Monday.

This guide is general information, not tax, legal or financial advice. Tax rules change and depend on your circumstances, so check GOV.UK or speak to an accountant before you decide. Sources: HMRC’s Budget 2026 rates and allowances (Annex A, updated 5 November 2026), GOV.UK guidance on setting up as a sole trader and running a limited company, and Companies House fees from 1 February 2026.