Sole trader or limited company?

Sole trader or limited company: whether to trade as one or the other is one of the first decisions you make when you start a business, and one of the most common questions people ask an accountant. There is no answer that suits everyone. The right choice depends on how much profit you expect to make, how you want to take money out, the risks in your line of work and how much paperwork you are happy to take on.

This guide sets out the benefits of a sole trader or limited company set-up and how the two compare, whether you are self-employed for the first time, a freelancer weighing up a limited company or sole trader, or already trading and wondering about registering as a limited company.

What is a sole trader?

As a sole trader, you and your business are the same in law. You keep the profits after tax, and you are personally responsible for the business's debts. Setting up is simple: you register for Self Assessment with HMRC and send a tax return each year.

You pay Income Tax and National Insurance on your profits, not on what you take out. The rates depend on your total income, and HMRC sets them out on GOV.UK. Like everyone, you have a personal allowance of £12,570 before Income Tax starts.

What is a limited company?

A limited company is a separate legal entity. It owns the business, signs contracts and pays its own tax. Its owners have limited liability, which means they are responsible for the company's debts only up to the value of their investment.

A company must be registered with Companies House before it starts trading, and Corporation Tax can be set up at the same time. The company needs its own bank account, kept separate from your personal banking. As a director you have legal duties: even if you hire an accountant, you remain responsible for the company's records, accounts and filings.

Sole trader vs limited company tax

The tax difference is often what people mean when they ask which is better.

A sole trader pays Income Tax and National Insurance on all the profit, whether it is drawn out or left in the business.

A limited company pays Corporation Tax on its profits:

• 19% on profits up to £50,000
• 25% on profits over £250,000
• marginal relief in between, so the rate rises gradually

Directors then take money out, commonly as a salary through payroll, as dividends, or a mix of the two. Salary is taxed through PAYE, and dividends are taxed on the shareholder personally.

Dividend tax allowance and dividend tax rates 2026/27

For the 2026/27 tax year, dividends are taxed like this:

• Dividend allowance: the first £500 of dividends each year is tax free
• Basic rate: 10.75%
• Higher rate: 35.75%
• Additional rate: 39.35%

Which rate applies depends on your total income, including salary and other income. Dividends can only be paid out of profits left after Corporation Tax.

Paperwork compared

Running a limited company means more admin, and more deadlines.

Missing company deadlines costs money. Accounts filed late at Companies House carry a penalty of £150 up to one month late, rising to £1,500 after six months, and a late Company Tax Return starts at £200. Our page on year-end accounts and Corporation Tax explains the company deadlines in more detail.

VAT works the same way for both. If taxable turnover for the last 12 months goes over £90,000, or you expect it to go over £90,000 in the next 30 days, you must register, whichever structure you use.

Limited company or sole trader: which suits you?

Neither is better in general. These are the things that usually tip the balance.

A sole trader often suits you if:

• you are starting out and profits are modest or uncertain
• you want simple records and one tax return a year
• you want to take all the profit as you need it

A limited company is often worth considering if:

• profits are high enough that you do not need to draw all of them each year
• your work carries risks you want kept separate from your personal assets
• clients or contracts expect you to work through a company
• you want to bring in other shareholders or investors

Your industry matters too. Freelancers and contractors weigh things differently from a shop or a landlord, and our pages for freelancers and landlords look at their situations.

Should you register as a sole trader or limited company to start with?

Many people start as a sole trader because it is quicker and cheaper to run, then set up a limited company once profits grow. Moving across later is common. The company is registered, the business transfers into it, and the sole trader business stops, with a final Self Assessment return covering the last period.

The reverse is harder. Closing a company takes more steps than stopping as a sole trader, so it is worth thinking ahead rather than incorporating too early.

How we help

We look at your expected income and costs and explain how each option would work in practice: what tax would be due, what you would need to file and when. We do not push one answer.

1. 1

   Free 20-minute call

   Tell us what you do, what you expect to earn and how you want to take money out.

2. 2

   Compare the options

   We set out how each structure would work with your figures.

3. 3

   Set up

   If you go ahead, we help you get registered and keep your books from day one.

Whichever you choose, we can keep your books, prepare your Self Assessment tax return or your company's year-end accounts, and run payroll for directors.

Questions people ask