Sole Trader Vs Limited Company?

If you’re starting a business — or growing one — this is one of the most searched questions in the UK:

“Should I stay a sole trader or set up a limited company?”

The right answer depends on four key areas:

• Tax

• Risk

• Administration

• Growth plans

Below is a practical, up-to-date guide using official HMRC and GOV.UK sources so you can make a confident decision.

What Is a Sole Trader?

As a sole trader, you and the business are legally the same person. You keep all the profits after tax, but you are personally responsible for any business debts.

You must register as self-employed if you earn more than £1,000 in a tax year (the trading allowance), as explained on GOV.UK’s official guidance:👉 https://www.gov.uk/become-sole-trader

As a sole trader, you pay:

• Income Tax on your profits

• Class 2 and Class 4 National Insurance (official rates here: https://www.gov.uk/self-employed-national-insurance-rates)

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This structure is simple, low cost, and easy to manage. Taking money out of the business is straightforward — the profits belong to you, the owner.

What Is a Limited Company?

A limited company is a separate legal entity registered with Companies House. This means you are legally separate from your company.

The company owns the profits, enters into contracts, and is responsible for its debts (subject to personal guarantees or misconduct).

Because the company is separate from you, money cannot simply be taken out freely. It must be extracted using specific methods — typically salary or dividends. If this is not done correctly, you may encounter issues with HMRC. e.g directors loan accounts

Limited companies pay Corporation Tax on profits. Current Corporation Tax rates are published here:

As of now:

• 19% small profits rate (up to £50,000)

• 25% main rate (over £250,000)

• Marginal relief applies between those thresholds

If you take dividends, personal dividend tax rules apply.

Guidance can be found here:👉 https://www.gov.uk/tax-on-dividends

When Should You Stay a Sole Trader?

For many new businesses, starting as a sole trader is the right choice.

It often makes sense if:

• Your profits are under £40,000–£50,000

• You withdraw most of the profits personally

• Your business risk is low

• You want minimal administration

• You are testing a new idea

Administration is lighter because there are:

• No Companies House filings

• No corporation tax returns

• Simpler bookkeeping requirements

However, from April 2026, many sole traders will fall under Making Tax Digital for Income Tax (MTD IT), depending on income levels. Official guidance can be found here:👉 https://www.gov.uk/guidance/check-if-youre-eligible-for-making-tax-digital-for-income-tax

Digital bookkeeping is therefore becoming important either way.

When Should You Consider a Limited Company?

A limited company often becomes more attractive in the following situations:

1️⃣ Your Profits Are Growing

If your business generates consistent profit and you do not need to withdraw all of it personally, a company can offer more flexibility.

However, incorporation is not automatically a tax saving. It depends on:

• Your profit level

• How much you extract

• Your personal tax band

• Dividend tax rates (see GOV.UK: https://www.gov.uk/tax-on-dividends)

A proper tax calculation is always recommended.

2️⃣ You Want Risk Protection

As a sole trader, if something goes wrong, you are personally liable. Your personal assets e.g house or savings may be at risk.

With a limited company, liability is generally limited to the company — provided you operate correctly.

This is particularly important for:

• Contractors

• Consultants

• Construction businesses

• Businesses signing high-value contracts

3️⃣ You Want Stronger Commercial Credibility

Some clients, suppliers, and lenders prefer dealing with limited companies.

This can help with:

• Tendering

• Securing larger contracts

• Bringing in investors

• Planning for a future sale

4️⃣ You Plan to Grow

Limited companies allow:

• Shareholders

• Different share structures

• Director salaries

• Employer pension contributions

• Business sale planning

These options are not available to sole traders.

What About VAT — Does It Affect the Decision?

VAT registration depends on turnover, not business structure.

If your taxable turnover exceeds £90,000 in any rolling 12-month period, you must register for VAT. Official guidance:👉 https://www.gov.uk/register-for-vat

Both sole traders and limited companies follow the same VAT threshold rules.

Quick Comparison

Factor	Sole Trader	Limited Company
Legal separation	No	Yes
Liability protection	No	Usually yes
Tax type	Income Tax	Corporation Tax + Dividend Tax
Administration	Low	Higher
Public records	No	Yes (Companies House)
Growth flexibility	Limited	High

Common Mistakes We See

• Incorporating too early when profits are still small

• Incorporating purely for “tax savings” without modelling withdrawals

• Ignoring personal liability risks

• Poor bookkeeping ahead of MTD changes

  
  

So… Should You Be a Sole Trader or a Limited Company?

There isn’t one universal answer.

For many new business owners, starting as a sole trader is sensible. As profits grow, risk increases, or scaling becomes the priority, incorporating may become the smarter long-term move.

The key is reviewing the decision at the right time — not just following what someone on social media suggests.

Still confused? Speak to an accountant now

Quick FAQs: Sole Trader vs Limited Company

Is it better to be a sole trader or a limited company?

It depends on your profit level, risk exposure, and growth plans. Sole traders have simpler admin, while limited companies offer more liability protection and planning flexibility.

At what income should I become a limited company?

Many business owners review incorporation once profits consistently exceed £40,000–£50,000, but tax, risk, and future plans should all be considered.

Do limited companies pay less tax than sole traders?

Not always. Limited companies pay Corporation Tax, and directors then pay tax on salary or dividends. The overall tax depends on how much you take out and your personal tax band.

Can I switch from sole trader to limited company later?

Yes. Many businesses start as sole traders and incorporate as profits grow. Planning the timing properly is important to avoid tax issues.

Can I take money out of a limited company whenever I want?

No. Money must be taken correctly through salary, dividends, or a properly recorded director’s loan. Taking funds incorrectly can create tax problems.