The choice between limited company vs sole trader shapes your tax bill, your personal risk, and how much paperwork lands on your desk every year. There is no universal answer: a freelance copywriter on £30,000 may be better off as a sole trader, while a consultant on £80,000 almost always benefits from incorporation. This guide compares the two structures across the criteria that matter most, and sits alongside our wider hub for accounting for the self-employed and sole traders.
At-a-glance comparison
| Factor | Sole trader | Limited company |
|---|---|---|
| Legal status | You and the business are the same | Separate legal entity |
| Liability | Unlimited personal liability | Limited to share capital |
| Tax on profits | Income tax 20-45% plus Class 4 NIC | Corporation tax 19-25% |
| Profit extraction | Drawings (no PAYE) | Salary plus dividends |
| Public disclosure | None | Accounts and officers on Companies House |
| Filing burden | Self Assessment annually | CT600, accounts, confirmation statement, payroll |
| Setup cost | None | Companies House incorporation fee |
| Best suited to | Side hustles, very small businesses | Profits above ~£40k, B2B clients, growth plans |
See our deeper articles on sole trader and private limited company for the underlying mechanics.
How the tax difference works
The gap between the two structures depends on how much profit you make and how you take it out:
- Sole trader: all profit is taxed as your income in the year it is made, at Income Tax rates of 20%, 40% and 45% above your personal allowance, plus Class 4 National Insurance.
- Limited company: the company pays Corporation Tax on its profit, at 19% up to £50,000, 25% above £250,000 and with marginal relief in between. You then pay Income Tax on any salary and dividend tax on the dividends you draw. Dividend rates are lower than salary rates, but dividends come out of profit that has already been taxed.
At modest profits the saving from a company is small and can be swallowed by the extra accountancy and filing costs. The difference usually grows once profit reaches the higher-rate band, and more so if you leave profit in the company or pay employer pension contributions instead of drawing everything.
The bands, allowances, National Insurance rates and dividend rates are set at each Budget, so run the comparison with the current figures from HMRC’s income tax rates and corporation tax rates pages, ideally with your accountant.
Beyond tax: things people forget
- Liability: a sole trader is personally on the hook for trade debts, claims and contracts. Incorporation puts a legal wall between business and home.
- Credibility: many enterprise customers, banks and procurement portals only contract with limited companies.
- Funding: equity investment and EIS/SEIS reliefs require a company.
- Pension planning: employer contributions from a limited company are corporation-tax deductible and avoid NIC, often the most tax-efficient long-term move.
- Privacy: company directors’ names, dates of birth (month and year) and registered office sit on the public Companies House register.
- Switching back: it is far easier to incorporate later than to disincorporate, so do not rush the move purely on theoretical tax savings.
Whichever route you choose, sound record-keeping is non-negotiable. If you stay a sole trader, our guide to sole trader bookkeeping basics covers the essentials, while the choice between cash basis and accruals accounting affects how you report profit under either structure.
When to incorporate
Common triggers:
- Profits consistently above £40,000-£50,000
- Winning B2B clients that require a limited company supplier
- Hiring your first employees
- Taking on liability-heavy work or signing customer contracts at scale
- Bringing in a co-founder or external investor
For the mechanics, our switching from sole trader to limited guide walks through the transfer of trade and assets. Remember that staying a sole trader keeps you in Self Assessment, so factor in how each structure changes your annual filing routine before you decide.
Closing thoughts
Most businesses start as sole traders to test the market and incorporate once profits and risk justify the extra admin. Read our first year accounts guide if you have just incorporated. See pricing for bookkeeping that suits sole traders and limited companies alike.