1. Quick comparison table
Here's the headline comparison. We'll dig into each point below.
| Sole Trader | Limited Company | |
|---|---|---|
| Tax on profits | Income tax (20-45%) | Corporation tax (19-25%) + dividend tax (8.75-39.35%) |
| National Insurance | Class 2 (£3.65/week) + Class 4 (6%/2%) | Employer NI (15%) + Employee NI (only if salary above threshold) |
| Personal liability | Unlimited — you're personally liable | Limited to your investment in the company |
| Setup cost | Free — just register with HMRC | £12 online at Companies House |
| Annual accounts | Self-assessment tax return | Company accounts + Corporation Tax return + personal self-assessment |
| Accountant fees | £200-500/year | £1,000-2,000/year |
| Public information | None | Directors, registered address, and accounts on public record |
| Profit extraction | All profit is yours automatically | Via salary, dividends, pension, or expenses |
| Best for | Under ~£35k profit, simple businesses | Over ~£35k profit, higher-risk work, multiple clients |
2. Tax differences explained
Sole trader taxation
As a sole trader, your business profit is taxed as personal income. After deducting allowable expenses, you pay income tax on everything above the £12,570 personal allowance:
- Basic rate (20%): £12,571 – £50,270
- Higher rate (40%): £50,271 – £125,140
- Additional rate (45%): Over £125,140
Scottish taxpayers have six bands from 19% to 48% — generally paying slightly more at most income levels.
Limited company taxation
A limited company is a separate legal entity. The company pays corporation tax on its profits, then you personally pay tax when you extract money:
- Corporation tax: 19% on profits up to £50,000, rising to 25% above £250,000
- Director salary: Taxed as employment income (income tax + NICs)
- Dividends: 10.75% (basic), 35.75% (higher), 39.35% (additional) — after a £500 tax-free allowance
Tip
The most common strategy: pay yourself a salary of £12,570 (using the personal allowance with no income tax) and extract remaining profits as dividends. This minimises the combined tax burden. Use our Dividend vs Salary Optimiser to find your optimal split.
Example: £60,000 profit
Let's compare the tax on £60,000 profit (after expenses) under each structure:
| Sole Trader | Limited Company | |
|---|---|---|
| Profit | £60,000 | £60,000 |
| Income/corp tax | £11,432 | £8,796 (corporation tax) |
| Dividend tax | — | £3,977 |
| NICs | £2,647 (Class 2 + 4) | £1,136 (employer NI) |
| Total tax | ~£14,078 | ~£13,909 |
| Take-home | ~£45,922 | ~£46,091 |
| Difference | — | Only ~£170/year more |
Note
These are illustrative figures. Your actual numbers depend on expenses, pension contributions, other income, and whether you're in Scotland. Use our Take-Home Pay Calculator for your exact figures.
3. National Insurance
Sole trader NICs
Sole traders pay two types of National Insurance:
- Class 2: £3.65/week (£190/year) — flat rate, builds state pension entitlement
- Class 4: 6% on profits between £12,570–£50,270, then 2% above that
On £50,000 profit, that's roughly £2,125 in NICs. It's not huge, but combined with income tax it adds up.
Limited company NICs
As a director paying yourself a salary of £12,570, you pay:
- Employee NICs: £0 (salary is at the threshold)
- Employer NICs: 15% on salary above £5,000 = ~£1,136/year
Crucially, dividends don't attract any National Insurance. However, with the 2026/27 dividend tax increases (basic rate now 10.75%, higher rate 35.75%), the tax advantage of limited companies has narrowed significantly compared to previous years. The NI saving on dividends is partly offset by higher dividend tax rates.
Important
Single-director companies are not eligible for the Employment Allowance (£10,500 NI relief) since April 2023. You only get this if you have other employees.
4. Personal liability
Sole trader: unlimited liability
As a sole trader, there is no legal separation between you and your business. If your business incurs debts, gets sued, or faces a claim — your personal assets (savings, house, car) are at risk.
Limited company: limited liability
A limited company is a separate legal entity. Your personal liability is limited to your shareholding (typically £1). If the company fails, creditors can only claim against company assets, not your personal ones.
Important
Limited liability has exceptions. Directors can be held personally liable for fraudulent trading, wrongful trading (continuing when insolvency is inevitable), or personal guarantees given to banks or landlords.
For freelancers doing professional work (consulting, development, design), professional indemnity insurance provides similar protection regardless of structure — typically £300-800/year. Use our Expense Checker to see what insurance costs are allowable.
5. Admin and compliance
Sole trader admin
- Register with HMRC as self-employed (free, online)
- File one self-assessment tax return per year (deadline: 31 January)
- Keep records of income and expenses for 5 years
- Register for VAT if turnover exceeds £90,000
That's it. Many sole traders do their own tax return with software like GoSimpleTax.
Limited company admin
- File annual accounts with Companies House (deadline: 9 months after year-end)
- File a Corporation Tax return with HMRC (deadline: 12 months after year-end)
- File a confirmation statement with Companies House annually (£13)
- Run payroll for director salary (monthly RTI submissions to HMRC)
- Issue dividend vouchers each time you take dividends
- File your personal self-assessment (still required for dividends)
- Maintain statutory registers (directors, shareholders, PSC)
- Keep company records for 6 years
Most limited company directors hire an accountant for £80-170/month. Doing it yourself is possible but time-consuming and risks errors.
6. Running costs
| Sole Trader | Limited Company | |
|---|---|---|
| Formation | Free | £12 (Companies House) |
| Accountant | £200-500/year | £1,000-2,000/year |
| Companies House | N/A | £13/year (confirmation statement) |
| Payroll software | N/A | £0-20/month (often included in accountant fee) |
| Bank account | £0-10/month | £0-10/month |
| Time spent on admin | ~2 hours/month | ~5 hours/month (or delegate to accountant) |
Tip
The accountant fee difference (£800-1,500/year) is the real cost of running a limited company. If your tax saving is less than this, a limited company isn't worth it purely on financial grounds.
7. When to switch to a limited company
There's no single answer, but here are the guidelines most accountants use:
Stay as a sole trader if:
- Your annual profit is consistently under £30,000-35,000
- You value simplicity and minimal admin
- Your business is low-risk (unlikely to be sued)
- You're just starting out and want to test the waters
- You expect your income to vary significantly year to year
Consider a limited company if:
- Your annual profit is consistently above £35,000-40,000
- You want to keep profits in the business for future investment
- Your clients require or prefer to work with limited companies
- You want limited liability protection
- You want to make tax-efficient employer pension contributions
- You're a contractor and need a limited company for compliance
Note
The crossover point depends on your expenses, pension plans, and whether you're in Scotland. At £40,000 profit, you might save £1,000-2,000/year with a limited company — but after accountant fees, the net saving could be only a few hundred pounds. At £60,000+ profit, the saving is typically £3,000-5,000/year even after higher accountant fees.
8. IR35 considerations
If you're a contractor working through a limited company, IR35 is a critical factor. If HMRC determines that your working arrangement is really employment (you'd be an employee if the intermediary company didn't exist), you're taxed as an employee — losing all the tax advantages of the limited company structure.
Since April 2021, medium and large private sector clients are responsible for determining your IR35 status. If they determine you're inside IR35, they (or your agency) deduct tax and NICs before paying you.
Important
If all or most of your work is caught by IR35, a limited company offers no tax advantage over employment — and costs more to run. In this scenario, an umbrella company or remaining as a sole trader may be more practical.
Use our IR35 Status Checker to assess your current arrangement and get actionable tips to strengthen your position.
9. How to set up a limited company
Incorporating is straightforward:
- Choose a company name — check availability at Companies House
- Register online at Companies House (£12, usually approved within 24 hours)
- Set up a business bank account — Tide, Starling, or a high street bank
- Register for Corporation Tax with HMRC (within 3 months of starting to trade)
- Set up payroll — register as an employer with HMRC for your director salary
- Get accounting software — FreeAgent, Xero, or QuickBooks
- Find an accountant — ideally one experienced with freelancers/contractors
- Register for VAT if turnover exceeds £90,000 (or voluntarily if beneficial)
Tip
You can incorporate at any time of year. Your company's financial year starts from the date of incorporation. Most accountants can handle the transition for £200-500 and ensure nothing falls through the cracks with HMRC.
10. Summary: which is right for you?
The decision comes down to three factors: profit level, risk tolerance, and admin tolerance.
- Under £30,000 profit: Almost certainly stay as a sole trader. The admin and accountant costs of a limited company will eat any tax saving.
- £30,000-50,000 profit: The grey zone. The tax saving from a limited company is small and likely wiped out by higher accountant fees (£1,000-2,000/year). Run the exact numbers with our calculator.
- Over £50,000 profit: A limited company starts to save meaningful money — but less than it used to, due to the 2026/27 dividend tax increases. At £60,000 the saving is only ~£170/year before accountant fees. At £80,000+ the saving grows to several thousand.