Answers · UK 2025/26

Should I be a limited company or sole trader in the UK?

A sole trader is simplest and cheapest below ~£30,000 profit. Above ~£40,000 a limited company often saves tax through low salary + dividends. Limited companies offer limited liability, but require Companies House filings, Corporation Tax returns and director's self assessment.

Last updated: 16 May 2026Last reviewed: 16 May 2026How we verify

Full answer

Sole traders pay Income Tax (20%/40%/45%) and Class 4 NI (6% to £50,270, 2% above) on profit, plus £3.45/week Class 2 if profit exceeds £12,570. Setup is free with HMRC registration, accounts are kept on a cash or accruals basis, and you keep 100% of post-tax profit. Limited companies pay 19% Corporation Tax on small profits (up to £50,000) rising to a 26.5% marginal rate between £50,001 and £250,000 and 25% above. The director typically draws a £12,570 salary (covered by Personal Allowance, NI-free up to £5,000 with the Employment Allowance) plus dividends. Dividends above the £500 allowance are taxed at 8.75% (basic), 33.75% (higher) and 39.35% (additional). Worked example: £60,000 profit. Sole trader pays roughly £14,400 tax+NI, keeping £45,600. Limited company pays £9,500 Corp Tax on £50,000 post-salary profit + ~£2,500 dividend tax = ~£12,000, keeping £48,000. Savings shrink at lower profits and accountancy/insurance/Companies-House fees of £1,500-£2,500 erode the benefit. Limited liability is the main non-tax reason — your personal assets are protected from business debts unless you personally guarantee.