This is probably the most common question anyone starting a business in the UK asks: should I go limited or stay as a sole trader? The answer isn’t one-size-fits-all. It depends on how much you earn, what industry you’re in, how much risk you carry, and honestly, how much admin you can be bothered with.
The Tax Difference (This Is Usually the Decider)
As a sole trader, all your profits are taxed as personal income: 20% basic rate, 40% higher rate, 45% additional rate, plus Class 2 and Class 4 National Insurance (6% on profits between £12,570 and £50,270, and 2% above that).
As a limited company director, your company pays Corporation Tax at 19% on profits up to £50,000 (rising to 25% over £250,000, with marginal relief in between). You then pay yourself a small salary (typically £12,570 to use your Personal Allowance) and take the rest as dividends. Dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate), with a £500 tax-free dividend allowance.
Let’s put real numbers on it. Take Sophie, a freelance graphic designer in Manchester earning £60,000 profit. As a sole trader, she pays roughly £14,800 in tax and NI. Through a limited company, extracting the same £60,000 in salary and dividends, she pays about £11,200 combined. That’s £3,600 a year back in her pocket. Every year.
Liability Protection
A limited company is its own legal entity. If it goes bust or gets sued, your personal stuff — house, savings, car — is generally protected. As a sole trader, there’s no legal line between you and your business. Creditors can come after everything you own.
In practice, the protection has limits. Banks usually want personal guarantees for company loans, and directors can be personally liable for things like unpaid PAYE/NI or wrongful trading. But it’s still a meaningful safety net.
Credibility
Some clients and customers prefer dealing with limited companies. In the construction industry, for example, loads of main contractors will only subcontract to Ltd companies. Having “Ltd” after your name can suggest permanence and professionalism, even if the underlying business is just you and a laptop.
The Admin Burden
Here’s where sole trading wins hands down. Register for self-assessment, keep records, file one tax return a year. Total accounting cost: £200–£500/year for a simple business.
Limited companies? Annual accounts for Companies House, a Corporation Tax return for HMRC, a Confirmation Statement, running PAYE payroll (even if you’re only paying yourself), and maintaining statutory registers. Accounting cost: £800–£2,500/year. Plus penalties if you file late. It’s not terrible, but it’s definitely more faff.
When to Switch from Sole Trader to Limited
The general rule of thumb: a limited company becomes worth it tax-wise when your profits consistently clear £30,000–£35,000 a year. Below that, the extra accounting costs and admin tend to eat the tax savings.
Other reasons to switch:
- You need liability protection (you’re in a higher-risk industry)
- Clients require you to be limited
- You want to bring in partners or investors
- You want to build something you can sell (companies are easier to sell than sole trader businesses)
- You want to keep profits in the company for future investment rather than paying personal tax on them right away
IR35 Considerations
If you’re a contractor working through a limited company, IR35 is a big deal. If your engagements fall inside IR35 (meaning you’re basically a disguised employee), you lose most of the tax advantages of being limited. In that case, an umbrella company might be simpler and cheaper. See our IR35 guide for the full picture.
The Dividend Strategy
The optimal approach for most limited company directors in 2025/26: pay yourself a salary of £12,570 (uses the full Personal Allowance, no employee NI below the Primary Threshold), then take remaining profits as dividends. This avoids NI on the dividend portion and takes advantage of the lower dividend tax rates.
Keep enough in the company for Corporation Tax, upcoming expenses, and a cash buffer. Taking everything out as dividends each year is legal but leaves the company exposed if work dries up.
What Each Structure Actually Costs
- Sole trader: Free to set up. Registration takes minutes. Accounting: £200–£500/year.
- Limited company: £12 to incorporate at Companies House. Registered office service if needed: £50–£150/year. Accounting: £800–£2,500/year. Annual Confirmation Statement: £13.
Use our free Limited Company calculator to compare your tax position under both structures and see which one saves you more.