Sole trader vs limited company: which is right for you?

Choosing the right structure affects how much tax you pay, how much admin you carry, and how protected you are if things go wrong. Neither option is "better" — it depends on your profit, your plans and your appetite for paperwork.

How a sole trader is taxed

As a sole trader, you and the business are the same legal person. You pay Income Tax on your profits at 20%, 40% or 45%, plus Class 4 National Insurance (6% on profits between £12,570 and £50,270, then 2% above). It's simple to set up and run, and you keep things off the public record — but all your profit is taxed in the year you earn it, whether you take it out of the business or not.

How a limited company is taxed

A limited company is a separate legal entity. The company pays Corporation Tax on its profits — 19% on profits up to £50,000, 25% above £250,000, with a tapered rate in between. You then take money out as a mix of salary and dividends, each taxed in your own hands (dividends at 8.75% / 33.75% / 39.35% after the £500 dividend allowance).

The advantage: you only pay personal tax on what you actually withdraw, so you can leave profit in the company and control your own tax timing. The trade-off is more admin — annual accounts, a Corporation Tax return, Companies House filings and a director's Self Assessment.

The tipping point

For many people a limited company starts to become more tax-efficient once profits comfortably exceed roughly £30,000–£50,000 a year, especially if you don't need to draw all the profit personally. Below that, the extra accountancy and admin often outweigh the saving, and being a sole trader is simpler. The honest answer is that it depends on your numbers — the only way to know is to model both.

Beyond tax

• Liability — a company gives you limited liability, so your personal assets are generally protected if the business runs into debt. A sole trader is personally liable.
• Credibility — some clients and lenders prefer dealing with a limited company.
• Admin & privacy — companies file public accounts and have more obligations; sole traders keep it private and light.
• Getting paid — as a sole trader your profit is yours; as a director you must follow the rules for salary and dividends.

You don't have to decide forever

Plenty of people start as a sole trader and incorporate later once profits grow — that's a perfectly normal path. The key is to review it as your business changes, not just at the start.

This guide is general information, not personal tax advice. Rates shown are for the 2025–26 tax year and can change — ask our team about your situation.