Sole Trader or Limited Company: Which Is Right for You?
Updated: 4 hours ago
"Should I go limited?" is a question we're asked a lot. There's no single right answer. It depends on how much you earn, what you plan to do with the profits, and how much paperwork you're happy with. Here's a plain-English look at the differences to help you decide.
Being a sole trader
As a sole trader, you and your business are legally the same. You register with HMRC for Self Assessment, keep records of your income and expenses, and pay Income Tax and National Insurance on your profits.
The advantages:
Quick, simple and free to set up
Less paperwork and lower accountancy costs
Your finances stay private, with nothing published on Companies House
All the profit is yours to take whenever you like
The drawbacks:
Unlimited liability: if the business runs up debts, your personal assets could be at risk
As profits grow, you pay Income Tax at 40% (and Class 4 National Insurance at 2%) on profits over £50,270, whether you need the money or not
Some larger clients prefer to work with limited companies
From April 2027, sole traders with turnover over £30,000 will need to follow Making Tax Digital rules
Running a limited company
A limited company is a separate legal entity. It owns the business, pays Corporation Tax on its profits, and you're usually both a director and a shareholder. You get paid through a mix of salary and dividends.
The advantages:
Limited liability: your personal assets are generally protected if things go wrong
Profits kept in the company are taxed at Corporation Tax rates (19% on profits up to £50,000, rising to 25% above £250,000) rather than your personal tax rate
You can choose when to take money out, which helps you plan your personal tax over several years
It can look more established to customers and suppliers
The drawbacks:
More admin: annual accounts and a confirmation statement to Companies House, a Corporation Tax return, a payroll if you pay yourself a salary, and your personal tax return
Higher accountancy fees
Your company accounts and details are on public record
The money belongs to the company, not you. Taking it out has tax consequences
Dividend tax rates went up from April 2026, to 10.75% for basic-rate and 35.75% for higher-rate taxpayers, with only a £500 tax-free dividend allowance
So which saves more tax?
In the past, many people found a limited company saved tax once their profits reached the mid-£20,000s. Successive changes to Corporation Tax, dividend tax and National Insurance have narrowed that gap considerably. For many small businesses, the tax saving is now modest once you factor in the extra accountancy costs.
A limited company still tends to work well when:
your profits are comfortably into the higher-rate tax band
you don't need to take all the profit out each year, and can leave some in the company
your work carries risk and you want the protection of limited liability
you plan to grow, take on staff or bring in other shareholders
Staying a sole trader often makes more sense when profits are modest, you need most of the income to live on, or you value simplicity.
What about partnerships?
If you're in business with someone else, a traditional partnership works much like being a sole trader. Each partner pays tax on their share of the profit, and the partnership files its own return. It's simple, but partners usually have unlimited liability. A limited company or limited liability partnership (LLP) can offer more protection.
Can I switch later?
Yes. Many businesses start as sole traders and move to a limited company as the business grows. It's worth planning the timing carefully, as the move can affect things like your tax year, VAT registration, existing contracts and any assets you transfer into the company.
Get advice based on your figures
The right structure comes down to your numbers and your plans. We'll compare what you'd take home as a sole trader and as a limited company, explain the admin involved, and help you set up whichever suits you best. Find out more about our sole trader and partnership accounts and limited company services.
Thinking about going limited? Book a free consultation with Mark or Andrew, or call 0114 274 7759.
Tax rates shown are for the 2026 to 2027 tax year, based on HMRC information available in November 2026. Please get advice on your own circumstances.
