Sole trader and limited company are the two main business structures for self-employed people in the UK. A sole trader is simpler and often better for lower profits, while a limited company may save tax at higher profit levels but comes with more admin and costs. The right choice depends on your profits, personal circumstances, and tolerance for complexity.
This guide compares both options to help you decide.
Quick Comparison
| Factor | Sole Trader | Limited Company | |--------|-------------|-----------------| | Setup | Free, instant | £50-100, 24-48 hours | | Complexity | Simple | More complex | | Tax (£30k profit) | ~£5,500 | ~£6,200 | | Tax (£60k profit) | ~£15,000 | ~£12,500 | | Tax (£100k profit) | ~£32,000 | ~£25,000 | | Liability | Unlimited personal | Limited to company assets | | Privacy | Private | Public accounts | | Accounting costs | £150-300/year | £500-1,500+/year | | Taking money out | Direct access | Salary + dividends |
Tax figures are illustrative and depend on personal circumstances.
How Sole Trader Tax Works
As a sole trader, you pay tax on your business profits (income minus expenses).
Income Tax
| Band | Taxable Income | Rate | |------|----------------|------| | Personal Allowance | £0 – £12,570 | 0% | | Basic Rate | £12,571 – £50,270 | 20% | | Higher Rate | £50,271 – £125,140 | 40% | | Additional Rate | Over £125,140 | 45% |
National Insurance
| Type | Rate | On | |------|------|-----| | Class 2 | £3.45/week | Profits over £6,725 | | Class 4 | 6% | £12,570 – £50,270 | | Class 4 | 2% | Over £50,270 |
Sole Trader Example: £50,000 Profit
| Tax Type | Calculation | Amount | |----------|-------------|--------| | Income Tax (£12,570 at 0%) | — | £0 | | Income Tax (£37,430 at 20%) | 20% × £37,430 | £7,486 | | Class 2 NI | £3.45 × 52 | £179 | | Class 4 NI | 6% × £37,430 | £2,246 | | Total Tax | | £9,911 |
Effective rate: 19.8%
How Limited Company Tax Works
A limited company is a separate legal entity. The company pays tax on profits; you pay personal tax when extracting money.
Corporation Tax
| Profit Level | Rate | |--------------|------| | Under £50,000 | 19% (small profits rate) | | £50,000 – £250,000 | 19-25% (marginal relief) | | Over £250,000 | 25% |
Extracting Money: Salary + Dividends
Salary:
- Paid as employee of your company
- Subject to Income Tax and National Insurance
- Company pays employer's NI (13.8% above £9,100)
- Corporation Tax deductible
Dividends:
- Paid from post-tax profits
- No National Insurance
- Dividend tax rates (lower than income tax)
| Dividend Band | Rate | |---------------|------| | Dividend Allowance | £500 at 0% | | Basic rate band | 8.75% | | Higher rate band | 33.75% | | Additional rate band | 39.35% |
Optimal Salary Strategy
Most director-shareholders take:
- Low salary: £12,570 (Personal Allowance) — no Income Tax
- Dividends: for remaining income — lower tax than salary
This minimises NI while still building State Pension entitlement.
Limited Company Example: £50,000 Profit
Assuming salary of £12,570 and dividends for the rest:
Step 1: Company Tax | Item | Amount | |------|--------| | Company profit | £50,000 | | Director salary | −£12,570 | | Employer's NI (13.8% on £3,470) | −£479 | | Taxable profit | £36,951 | | Corporation Tax (19%) | £7,021 | | Profit after tax | £29,930 |
Step 2: Personal Tax | Item | Amount | |------|--------| | Salary | £12,570 | | Income Tax | £0 (covered by Personal Allowance) | | Employee NI | £0 (below threshold) | | Dividends available | £29,930 | | Dividend Allowance | £500 at 0% | | Remaining at 8.75% | £29,430 × 8.75% = £2,575 |
Total Tax (Company + Personal): £7,021 + £2,575 = £9,596
Effective rate: 19.2% (vs 19.8% as sole trader)
Savings: £315/year — barely worth the complexity at this level.
Tax Comparison by Profit Level
| Annual Profit | Sole Trader Tax | Ltd Company Tax | Saving | |---------------|-----------------|-----------------|--------| | £30,000 | ~£5,500 | ~£6,200 | Sole trader better | | £40,000 | ~£7,500 | ~£7,800 | Roughly equal | | £50,000 | ~£9,900 | ~£9,600 | ~£300 | | £60,000 | ~£15,000 | ~£12,500 | ~£2,500 | | £80,000 | ~£23,000 | ~£18,000 | ~£5,000 | | £100,000 | ~£32,000 | ~£25,000 | ~£7,000 |
Figures are estimates assuming optimal salary/dividend split, no other income, and all profits extracted. Your situation may differ.
Key insight: Tax savings from a limited company only become significant above £50,000-60,000 profit.
Beyond Tax: Other Factors
Limited Liability
Sole trader: You're personally liable for all business debts. If your business fails owing money, creditors can pursue your personal assets.
Limited company: Liability is limited to company assets. Your personal assets are protected (unless you've personally guaranteed debts or acted wrongfully).
When this matters:
- Taking on significant debt
- High-risk activities
- Contracts with large potential liabilities
- Working in litigation-prone industries
Credibility and Perception
Some clients prefer working with limited companies:
- Appears more established
- Required by some corporate clients
- May be needed for certain contracts
Others don't care—especially consumers and small businesses.
Privacy
Sole trader: Your finances are private. Only HMRC sees your income.
Limited company: Annual accounts are filed at Companies House and publicly available. Anyone can see:
- Your company's assets and liabilities
- Profit/loss (simplified for small companies)
- Director names and addresses
- Shareholdings
Admin and Costs
Sole trader admin:
- Keep records of income and expenses
- File Self Assessment by 31 January
- That's essentially it
Limited company admin:
- Keep detailed accounting records
- Prepare annual accounts (usually need an accountant)
- File accounts at Companies House
- File confirmation statement annually
- File Corporation Tax return
- Run payroll (even just for yourself)
- File directors' Self Assessment
Cost comparison: | Item | Sole Trader | Limited Company | |------|-------------|-----------------| | Accountant | £150-300/year | £500-1,500+/year | | Companies House | £0 | £34/year (confirmation) | | Payroll software | £0 | £0-150/year | | Total admin cost | ~£200/year | ~£700-1,700/year |
The extra £500-1,500 in accountancy fees can wipe out tax savings at lower profit levels.
Flexibility
Sole trader: All profits are yours immediately. Take what you want, when you want.
Limited company: Money belongs to the company until properly extracted. Options:
- Salary (must run payroll)
- Dividends (must have distributable reserves)
- Director's loan (must repay within 9 months or face tax)
- Expenses (must be genuine business expenses)
If you need flexible, immediate access to all earnings, sole trader is simpler.
Mortgage Applications
Lenders treat income differently:
Sole trader: Show your Self Assessment returns (SA302). Lenders use your profit figure.
Limited company: More complex. Lenders may look at:
- Your salary + dividends
- Company accounts
- Retained profits
Some lenders prefer sole trader applications; others are familiar with limited companies. Either can work.
When to Stay as a Sole Trader
Consider remaining a sole trader if:
- Profits under £40,000-50,000 — Limited company unlikely to save tax
- You need all the money — Want immediate access to earnings
- You value simplicity — Don't want extra admin
- Low risk business — Limited liability not crucial
- Privacy matters — Don't want public accounts
When to Consider a Limited Company
Consider incorporating if:
- Profits consistently over £50,000 — Tax savings become meaningful
- You can leave money in the company — Don't need all profits immediately
- You want liability protection — High-risk activities or contracts
- Clients require it — Some corporates only work with Ltd companies
- You're raising investment — Easier to issue shares
- Planning for sale — Companies are easier to sell than sole trader businesses
The "Crossover Point"
There's no magic number, but the typical crossover is:
| Profit Level | Recommendation | |--------------|----------------| | Under £30,000 | Stay sole trader | | £30,000-50,000 | Probably stay sole trader | | £50,000-60,000 | Consider limited company | | Over £60,000 | Likely worth incorporating |
Important: These are guidelines. Your situation—other income, spouse's tax position, need for money, risk tolerance—affects the calculation.
The Incorporation Process
If you decide to incorporate:
Step 1: Form the Company
Register at Companies House:
- Choose a company name
- Appoint director(s)
- Issue shares
- Register address
- Cost: £50 online
Step 2: Register for Corporation Tax
HMRC registers you automatically when you incorporate, but you may need to provide additional details.
Step 3: Set Up Business Banking
Open a business current account in the company name. You cannot use a personal account.
Step 4: Transfer Your Business
Options:
- Sell to company — May trigger Capital Gains Tax
- Cessation and restart — Close sole trader, start fresh in company
- Transfer assets — Move equipment, stock, etc.
Get professional advice—mistakes can be costly.
Step 5: Close Your Sole Trader Business
- File final Self Assessment
- Inform HMRC you've ceased self-employment
- Complete any outstanding obligations
The Middle Ground: Stay Flexible
You don't have to decide forever:
- Start as sole trader — Simple, no barrier to entry
- Build your business — Focus on earning, not structure
- Review annually — When profits exceed £50,000 consistently
- Incorporate when it makes sense — After proper advice
Many successful business owners stayed sole traders for years before incorporating—and some never do.
Getting Advice
For profits over £50,000, get professional advice before deciding:
Questions to ask an accountant:
- What's my tax liability as sole trader vs limited company?
- What are the one-time costs of incorporating?
- How much will my annual admin costs increase?
- Are there any personal factors that affect the calculation?
- What's the optimal salary/dividend split for my situation?
A one-hour consultation (£100-200) can save thousands in poor decisions.
Summary: Quick Decision Guide
| Your Situation | Likely Best Option | |----------------|-------------------| | Just starting out | Sole trader | | Profits under £40,000 | Sole trader | | Profits £40,000-60,000 | Review with accountant | | Profits over £60,000 | Probably limited company | | Need liability protection | Limited company | | Want simplicity | Sole trader | | Need all money immediately | Sole trader | | Can leave profits in business | Limited company |
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