Answers · UK 2025/26
Should I be a sole trader or set up a limited company?
Sole trader is simpler and cheaper to run but pays Income Tax (20–45%) + Class 4 NI (6–2%) on all profits. A limited company pays 19–25% Corporation Tax on profits, allowing dividend extraction at lower rates — typically saving tax above ~£40,000–£50,000 profit/year.
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Sole trader: simple, no incorporation costs, accounts on Self Assessment, all profits taxed as personal income at 20%/40%/45% plus Class 4 NI 6%/2%. Limited company: profits taxed at 19% (small profits rate, ≤£50k) up to 25% (>£250k), with marginal relief between. Salary + dividend extraction often saves tax above ~£40,000–£50,000 profit because dividend tax rates (8.75%/33.75%/39.35%) are lower than Income Tax + NI combined. But: incorporation costs (~£12), annual accounts, Companies House confirmation statement, separate bank account, IR35 risks if you contract, public records of director details. Sole trader simpler if profits are modest (<£30k), variable, or you want privacy. Limited company beats sole trader on tax if: profits are stable >£40k, you keep some profits in the company, or you have a non-working spouse to split dividends (since 2016 dividend split rules). Use our /compare/sole-trader-vs-limited-company/ for a side-by-side breakdown.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.