When I talk to friends starting out, the question I hear most often isn't "how do I register?" – it's "should I even bother with a limited company?". The honest answer is that it depends on your numbers, your clients, and how much admin you're prepared to do. This guide walks through the real trade-offs, with worked examples at three profit levels so you can see where the crossover is for you.
The 60-second answer
Most UK founders should start as a sole trader and graduate to a limited company once the non-tax reasons justify the extra admin: liability protection, client preference, retaining profit in the business, or qualifying for the Employment Allowance through a second employee. The dividend tax rise on 6 April 2026 narrowed the pure tax case for limited company substantially. For a solo director who extracts all profit and can't claim the Employment Allowance, sole trader now matches or marginally beats limited company across the full profit range shown in the table below. The "right" answer is almost always a calculation on your specific numbers, not a rule of thumb.
If you've already decided and want the step-by-step on what to do next, our start your limited company checklist covers the first 30 days after incorporation.
What is a sole trader?
A sole trader is the simplest legal form of UK business. Legally, you and the business are the same entity – there's no separate company, no shareholders, no distinction between business money and personal money beyond the one you choose to impose with a separate bank account. HMRC treats you as self-employed. You invoice clients in your own name (or a trading name that's still legally you), keep records of what you earn and spend, and pay tax on the net profit.
Registering is straightforward. You tell HMRC you're now self-employed via the SA1 form or the Set up as self-employed service on gov.uk. Do this before 5 October after the end of your first tax year of trading. You'll be given a Unique Taxpayer Reference (UTR), which you use to file a Self Assessment return every January.
On the tax side, your sole-trader profits are taxed through Self Assessment. You pay Income Tax on profit above the Personal Allowance of £12,570, plus Class 4 National Insurance on profit above £12,570 at 6%, then 2% above the upper profits limit of £50,270. Class 2 NIC stopped being compulsory for most self-employed people from 6 April 2024; you can still pay it voluntarily if you want to build entitlement to certain state benefits. The big new catch from 6 April 2026 is Making Tax Digital for Income Tax Self Assessment, which requires self-employed and landlord income over £50,000 to be reported quarterly through compatible software. That threshold drops to £30,000 from 6 April 2027 and to £20,000 from 6 April 2028, so most sole traders will be inside MTD ITSA within a couple of years.
The single most important thing to understand about being a sole trader is unlimited personal liability. There is no legal wall between you and the business. If a supplier sues, if HMRC raises an unpaid tax bill, or if a customer successfully pursues a claim, your personal assets – house, car, savings – are available to settle those debts. For some businesses that liability is theoretical; for others, it's the reason you wouldn't dream of running them this way.
What is a limited company?
A private limited company is a separate legal entity. You form it by registering with Companies House, which gives the company its own legal identity, its own bank account, its own tax reference, and most importantly its own liability. The company owns its profits. You own shares in the company. You probably also work for the company as a director.
Day-to-day, you get money out of the company in one of a few ways: a salary (like any employee), dividends (a distribution of post-tax profits, paid to you as a shareholder), reimbursed business expenses, or an interest-free director's loan (carefully, with paperwork). The tax-efficient combination for an owner-director is usually a small salary up to around the Personal Allowance, with the rest taken as dividends.
The reporting burden is where the limited company structure genuinely costs you time or money. Every year you file a set of annual accounts with Companies House, a Corporation Tax return (CT600) with HMRC, and a confirmation statement with Companies House confirming your directors, shareholders, and Persons with Significant Control (PSCs) are still current. If you take a salary you run a PAYE scheme and file Real Time Information monthly. If you cross the VAT threshold you file VAT quarterly. None of it is individually complicated; collectively it's materially more work than a single annual Self Assessment.
The name for the main benefit is exactly what it says on the tin: limited liability. If the company fails owing money, creditors generally can only pursue the company's own assets, not the directors' personal ones. There are specific caveats that pierce that veil (covered further down) but in most normal trading situations, a limited company shields your personal finances from business misfortune in a way a sole trader structure never can.
Head-to-head: tax treatment
The tax comparison is the heart of the decision and the area where most generic advice goes wrong, because the answer changes with the profit level, whether you can claim the Employment Allowance, and how much profit you actually extract versus leave in the business. The table below compares a sole trader with a single-director limited company (no Employment Allowance) at three common profit levels, using the 2026/27 UK tax year rates.
Assumptions for the limited company side: director takes a salary of £12,570 to use the full Personal Allowance, the company pays employer's NI on that salary (no Employment Allowance because there is only one employee who is also a director), all remaining profit after Corporation Tax is paid out as a dividend, and the £500 Dividend Allowance is used in full. Dividend rates are the 2026/27 figures of 10.75% basic, 35.75% higher, and 39.35% additional.
| Annual profit (before tax) | Sole trader take-home | Limited co. take-home | Difference |
|---|---|---|---|
| £30,000 | £25,468 | £24,403 | Sole trader +£1,065 |
| £60,000 | £46,111 | £46,091 | Sole trader +£20 |
| £100,000 | £69,311 | £65,210 | Sole trader +£4,101 |
Illustrative only. Rounded to whole pounds. 2026/27 rates. Assumes single-director limited company without Employment Allowance and full dividend extraction. Figures computed from gov.uk-verified rates as of 2026-04-21.
The headline is uncomfortable for the "always go limited" crowd: with 2026/27 rates and no Employment Allowance, sole trader beats limited company at every one of the three profit levels in the table, once the director extracts all of their profit. The reason is the April 2026 dividend tax rise. The combined effective rate on a pound of company profit paid out as a dividend is now Corporation Tax plus dividend tax: at the small-profits band that's 19% plus 10.75% (basic) = 27.7% equivalent, or 19% plus 35.75% (higher) = 47.9% equivalent. A sole trader on the same basic-rate income pays 20% Income Tax plus 6% Class 4 NIC = 26% combined; on higher-rate income, 40% plus 2% = 42%. Sole trader is simply cheaper on extracted profit at both bands.
Two practical caveats that can flip the answer back. First, if your company qualifies for the Employment Allowance – generally, if you have a second employee on the payroll who isn't a director – you can knock out up to £10,500 of employer's NI, which at £60,000 of profit tips the comparison from sole trader +£20 to limited +£622. At £30,000 and at £100,000 sole trader still wins even with the Allowance. Second, these figures assume you extract every pound. If you leave profit inside the company – to reinvest, to build a cash buffer, to take out in a future lower-income year, or to make employer pension contributions – Corporation Tax at 19% or the marginal rate becomes the only tax paid on that slice, and the deferral advantage of a limited company reasserts itself.
Head-to-head: paperwork and admin
The admin difference is real and usually under-sold when people praise the limited company structure. Being a sole trader is genuinely low-maintenance. You keep records of income and expenses, file a Self Assessment once a year, and pay tax twice a year (31 January balancing payment plus first payment on account, then 31 July second payment on account). That's it. If your affairs are simple you can do the whole thing yourself in an evening.
A limited company carries meaningfully more. Over a typical year you'll file: annual statutory accounts at Companies House, full accounts with HMRC, a CT600 Corporation Tax return, a confirmation statement at Companies House, monthly RTI submissions if you're on payroll, and your own personal Self Assessment. You're also required to keep the statutory registers current – directors, PSCs, members – and update Companies House whenever they change. You'll remember the 3-month HMRC Corporation Tax deadline from the day you start trading, which catches plenty of new directors out.
The practical consequence is that most limited company directors engage an accountant, while plenty of sole traders don't. Budget accordingly – covered under running costs below.
Head-to-head: liability and personal risk
Limited liability is the single strongest argument for the company structure. If a client sues, a supplier goes unpaid, or the business simply fails, creditors look to the company's assets first. Your personal house, car, and savings are generally out of reach. Sole traders have no such protection: an unpaid business debt is your personal debt, and the same enforcement options that apply to a personal creditor apply.
That said, limited liability is not absolute, and it's worth understanding the three most common ways the veil gets pierced. First, personal guarantees: almost every business bank loan, large supplier credit account, or commercial lease for a new company will come with a director's personal guarantee. You are signing, in effect, to waive limited liability for that specific debt. Second, director disqualification and wrongful trading: if you carry on trading while knowing the company can't pay its debts, you can be personally liable to contribute to the shortfall and disqualified as a director for up to 15 years. Third, dishonesty and fraud: corporate veils don't shield directors from personal consequences of their own wrongdoing.
In practical terms: if you're providing professional advice, handling client funds, selling to consumers, employing people, or operating anything with physical safety implications, the liability argument for a limited company is strong. If you're a freelance writer or a software consultant working with B2B clients under professional indemnity insurance, the liability argument is weaker, and plenty of people in those fields operate happily as sole traders for years.
Head-to-head: privacy
Sole trader records are private. Your business address, your turnover, your profit figures – none of it goes on any public register. HMRC knows, and that's the end of who has a right to know.
A limited company is, by design, the opposite. The Companies House register is deliberately public. Anyone – a competitor, a disgruntled ex-client, a curious neighbour – can see your registered office address, the names and (from 2026) verified identities of your directors, the names of your shareholders with more than a small holding, your confirmation statements, and your filed accounts. For micro-entities, the filed accounts are minimal; for larger companies they reveal meaningful financial information.
The specific privacy flashpoint for most new directors is the registered office address. If you put your home address on the register, it's public forever – Companies House doesn't remove historical filings. The fix is a service address: many formation agents, accountants, and specialist providers offer one for a small annual fee, and you can use it as your registered office, your directors' service address, or both. Set this up on day one if your home address matters to you.
Head-to-head: credibility and perception
The credibility argument is often overplayed. The honest truth is that most of your customers will never check your legal structure. If you run a small service business, your clients care about your work, your price, and whether you return calls – not whether there's a "Ltd" after your name.
There are specific situations where structure does matter. Large B2B buyers – big corporates, the public sector, regulated industries – frequently have procurement policies that require vendors to be registered companies. Some will not contract with a sole trader at all. Professional indemnity insurers sometimes offer better rates or wider cover for limited companies. And certain trade bodies restrict membership to incorporated entities.
Banking can cut either way. A business bank account is available to both structures. Sole trader accounts are typically faster to open and have fewer onboarding hoops; limited company accounts take longer but give you the clean separation that makes both your accountant's life and your own bookkeeping much simpler.
Cost of running each
Sole trader running costs are minimal. There's no incorporation fee, no Companies House filing fee, no mandatory accountant. If you file your own Self Assessment, the only direct cost of being a sole trader is zero. An accountant to handle it for you typically costs between £200 and £600 a year for straightforward affairs, more if you have multiple income sources or complicated expenses.
Limited company costs are noticeably higher. The Companies House online incorporation fee rose to £100 on 1 February 2026 (£124 by post). The annual confirmation statement fee is £50 online (or £110 by post). Most owner-directors engage an accountant to handle the annual accounts, CT600, payroll and confirmation statement; typical fees are £600 to £1,500 a year for a single-director company, climbing with complexity. Add the cost of a service address if you want your home address off the public register (£30 to £90 a year from most providers), and you're realistically looking at around £700 to £1,800 a year of running cost before you've done a single calculation about tax.
When sole trader is the right call
The profile that fits sole trader cleanly: you're starting out or running a side-hustle, profits are modest (broadly under £30,000 for the current tax year), your liability exposure is low, you're the only person in the business, you want the simplest possible administrative life, and your customers are either consumers or small businesses who won't ask whether you're incorporated.
Plenty of successful self-employed people stay sole traders for their entire career. Freelance writers, illustrators, photographers, trades with good public liability insurance, consultants with a handful of trusted clients, and many others find that the tax savings a limited company would offer never exceed the cost and friction of running one. If you fit that profile, don't let the marketing convince you otherwise.
When limited is the right call
The profile that fits limited company cleanly: profits are comfortably above the Personal Allowance, you have meaningful personal assets you'd like to protect behind a corporate veil, your clients prefer or require contracting with a registered company, you're bringing in a co-founder or investor (you can't share a sole trader), you want to make employer pension contributions from the business, or you want the cleanest possible separation between business and personal finances.
There's also a softer case worth taking seriously: the discipline of a limited company structure. Having a separate legal entity forces cleaner bookkeeping, more deliberate decisions about what's an expense and what isn't, and a clearer head about the difference between the company's money and yours. Some founders thrive on that structure; others find it a drag. Know yourself.
How to switch from sole trader to limited company
Moving across is well-trodden. The order matters; doing steps in the wrong sequence creates tax headaches. Here's the usual flow.
- Form the company. Incorporate with Companies House (£100 online, £124 by post) or use a formation agent. Choose a name, a SIC code, and a registered office. Register for Corporation Tax with HMRC within three months of starting to trade as the company – see our 3-month HMRC Corporation Tax deadline guide for the specifics.
- Open a business bank account in the company's name. This can't be your existing sole trader account. Different legal entity, different account.
- Cease trading as a sole trader. Write down the last date you traded as a sole trader and the first date you traded through the company. Keep these clean – they drive the final Self Assessment calculations. You'll still need to file Self Assessment for the tax year in which you stopped.
- Transfer assets at market value. Any business assets you own personally (equipment, stock, client goodwill) that will be used by the company should be transferred in, at fair market value, with a written record. HMRC will scrutinise goodwill transfers carefully; take advice.
- Handle VAT. If you were VAT-registered as a sole trader, you either deregister and have the company apply for its own VAT number (VAT1), or transfer the existing VAT registration to the company using VAT7 – the latter preserves VAT history and is usually preferred if you continue the same trade.
- Notify clients, suppliers, and HMRC. Tell clients to make future payments to the company. Update supplier records and invoicing details. Tell HMRC you've stopped being self-employed (separate to closing the Self Assessment record).
- Transfer contracts by novation, not assignment. Existing client and supplier contracts signed in your personal name don't move to the company automatically. Where you want the company to take them over, each counterparty needs to agree (a novation). Where that's too friction-heavy, continue the contract personally and bill your time to the company instead.
- Retain sole trader records for 5 years. You're required to keep your sole trader records for at least 5 years after the 31 January submission deadline for the relevant tax year. Don't bin anything the moment the company starts; HMRC can go back further than most people expect, and a VAT-registered business must also meet the 6-year VAT record rule.
Frequently asked questions
The questions I get most often from people deciding between the two, answered plainly.
Can I be a sole trader and run a limited company at the same time?
Yes, and it's common. The two are separate tax identities, so you can trade as a sole trader for one line of work and as a director of a limited company for another. You file Self Assessment for the sole trader income and the company files its own Corporation Tax return. Keep the books fully separate: one bank account and one invoicing flow per structure, no mixing of expenses. Most accountants handle both sides under a single engagement if you ask.
At what profit level does a limited company usually work out better?
There's no fixed crossover, and the 2pp rise in dividend tax rates for 2026/27 has narrowed the tax argument considerably. For a sole director who extracts all profit and can't claim the Employment Allowance, sole trader actually matches or marginally beats limited company across the typical profit range. The tax case for limited company is strongest when the company qualifies for the Employment Allowance (a second non-director employee), when you plan to retain profit in the business rather than extract it, or when you're making large employer pension contributions. Non-tax reasons (liability protection, client preference) are now often more decisive than the tax maths. Always run the numbers on your specific situation.
Do I pay more National Insurance as a sole trader?
Usually less, not more. Sole traders pay Class 4 NIC at 6% on profits between £12,570 and £50,270, and 2% above that. Class 2 has been voluntary for most since April 2024. A limited company pays employer's NI at 15% on director salary above the £5,000 secondary threshold, and the director pays employee NI on any salary above £12,570. If the company can claim the Employment Allowance (typically where there is a second employee who is not a director), up to £10,500 of employer's NI is wiped out entirely.
Can I switch from limited company back to sole trader?
Yes. You cease trading through the company (invoice any final work, settle liabilities, notify clients), transfer any business assets out of the company at market value, and either keep the company dormant or close it via voluntary strike-off. Once the company is wound down, you register as self-employed for Self Assessment and carry on. The mechanics are fiddly but well-trodden. If the company has retained profits, taking them out personally will trigger dividend tax, so the timing of the switch matters.
Is it harder to get a mortgage as a sole trader or a limited company director?
Neither is inherently harder, but lenders assess them differently. Sole traders are assessed on net profit from the last two or three years of Self Assessment. Limited company directors are often assessed on salary plus dividends drawn, which can understate the true earnings of a director who retains profit in the company. A growing number of lenders will also look at salary plus share of net profit for directors. Work with a broker who specialises in self-employed applications; it saves time.
Do I need an accountant if I'm a sole trader?
Strictly no, but usually worth it beyond hobby-scale turnover. You can file Self Assessment yourself for free on gov.uk. An accountant tends to pay for themselves once your affairs include any of: capital allowances on equipment, use-of-home claims, multiple income sources, VAT, or anything unusual. From 6 April 2026, Making Tax Digital for Income Tax Self Assessment requires self-employed and landlord income over £50,000 to be reported quarterly via compatible software, which tips more sole traders towards using an accountant or bookkeeper. The threshold drops to £30,000 from 6 April 2027 and to £20,000 from 6 April 2028.
What happens to my sole trader debts if I incorporate?
They stay with you personally. Incorporating does not transfer pre-existing debts to the new company. The limited liability protection the company offers applies only to debts the company incurs after it starts trading. If you owe suppliers or HMRC money from your sole trader period, you still owe it in your personal name, and forming a limited company doesn't change that. If you want the company to take over supplier relationships, negotiate a novation with each supplier; they have to agree.
Can my spouse be a shareholder in my limited company to save tax?
Yes, and it's a well-established planning strategy, but it must be genuine. Your spouse needs real shares with real rights (not just a dividend-only class contrived to shift income), they must actually receive the dividends into their own bank account, and the arrangement must reflect commercial reality. HMRC's settlements legislation catches schemes that are just artificial income-splitting. Done properly, it can use both spouses' personal allowances, dividend allowances, and basic-rate bands. Speak to an accountant before you issue the shares; the structuring matters.
Cross-checking the figures? The HMRC Income Tax rates page, Corporation Tax rates page, HMRC self-employed overview, and the Companies House fees page are the authoritative sources. Always verify against gov.uk before making a decision.
