Comparison · 2025/26
Sole Trader vs Limited Company UK
One of the most important decisions for any UK self-employed person: continue as a sole trader, or incorporate as a limited company? Tax efficiency, paperwork, liability and credibility all matter. This 2025/26 guide breaks down the trade-offs with worked examples.
Quick Comparison
| Feature | Sole Trader | Limited Company |
|---|---|---|
| Setup cost | £0 (register with HMRC) | £12 (Companies House) + setup time |
| Tax | Income Tax + Class 4 NI on profits | Corporation Tax (19%–25%) + tax on extraction (salary/dividends) |
| Liability | Unlimited personal liability | Limited to company assets |
| Privacy | Name/address private (unless required) | Public — registered at Companies House |
| Paperwork | Self Assessment annually | Self Assessment + Corporation Tax + annual accounts + confirmation statement |
| Accountant cost | £200–£600/year | £600–£1,500/year |
| Pension contributions | Personal — up to 100% of earnings | Employer contributions from company — very tax efficient |
| Credibility | OK for small clients/freelance | Often required by larger clients (especially B2B) |
| Mortgage applications | Last 2–3 years SA returns required | Salary + dividends or share of profits |
Tax Comparison at Different Profit Levels
Worked examples assuming standard sole trader vs Ltd company taking minimum NI salary (£12,570) + dividends. England rates, no IR35:
| Profit before tax | Sole Trader take-home | Ltd Co take-home | Ltd advantage |
|---|---|---|---|
| £30,000 | £24,422 | £25,082 | +£660 |
| £50,000 | £37,540 | £40,250 | +£2,710 |
| £80,000 | £54,940 | £59,300 | +£4,360 |
| £100,000 | £66,540 | £71,200 | +£4,660 |
| £150,000 | £91,140 | £99,400 | +£8,260 |
Figures illustrative — actual savings depend on pension contributions, salary level, dividend strategy, expenses, and other factors. Subtract Ltd company accountant cost (£600–£1,500/year) to get net benefit.
Pros & Cons: Sole Trader
✓ Pros
- Simple to set up (free)
- Minimal paperwork (one Self Assessment)
- Cheap accountant fees
- Full control, no shareholders
- Pension contributions personal — flexible
- Losses can offset other income
✗ Cons
- Unlimited personal liability
- Higher overall tax above ~£40k profit
- Class 4 NI on all profits over £12,570
- Less credible for big-client B2B work
- Personal allowance taper at £100k
- Limited tax-planning flexibility
Pros & Cons: Limited Company
✓ Pros
- Limited personal liability
- Tax-efficient at ~£40k+ profit
- Flexible dividend timing
- Pension contributions deductible from CT
- Can retain profits in company
- Spouse/partner can be shareholder
- More credibility with corporate clients
✗ Cons
- More paperwork (accounts + CT600 + CS01)
- Higher accountant fees (£600+)
- Public registry — name/address visible
- IR35 risk for contractors
- Strict separation of company & personal money
- Director duties & legal responsibilities
- Closing the company costs money
Decision Framework
Choose sole trader if:
- Profits below £40,000–£50,000
- You value simplicity over tax optimisation
- Business is part-time or side hustle
- You\'re unsure if the business will continue long-term
Choose limited company if:
- Profits sustainably above £50,000
- You want personal liability protection
- You need credibility for B2B clients
- You want to retain earnings in the business for growth
- You\'re outside IR35 if contracting
- You can afford the extra accountancy and admin overhead
FAQs
When is it worth setting up a limited company?
Rough rule of thumb: above £40,000–£50,000 annual profit, a limited company starts saving meaningful tax compared with sole trader. Below that level, the extra admin and costs often outweigh the savings. Above £80,000, the difference becomes substantial.
How much can I save with a limited company?
At £80,000 profit, a Ltd company structure (taking small salary + dividends) can save roughly £2,000–£5,000 per year vs sole trader, depending on dividend strategy. At £100,000+ savings grow because you can avoid the personal allowance taper.
What about IR35?
If you contract for a single client, you may be caught by IR35 rules — making the limited company tax-equivalent to employment. The benefits of incorporation diminish significantly for inside-IR35 contractors. Pure freelancers with multiple clients and genuinely outside IR35 keep the tax advantages.
How much does it cost to run a limited company?
Setup costs: £12 (Companies House) + optional formation agent (£50–£200). Ongoing: accountant £600–£1,500/year, business bank account £0–£10/month, annual confirmation statement £13. Total ~£700–£1,800 per year extra vs sole trader.
Can I move from sole trader to limited company?
Yes — you can incorporate at any time. You'll register a new company at Companies House, transfer business assets at market value (which may trigger CGT), close your Self Assessment as sole trader, and start filing Corporation Tax returns. Many sole traders incorporate once profits exceed £50k.
Calculators & Guides
Self-Employed Tax
Income tax + Class 4 NI
Corporation Tax
Ltd company tax
Dividend Tax
Tax on dividends from your company
Take-Home Pay
Compare with employed
→ Self-Employed Tax UK: Complete Guide
Deep dive into self-employment taxation
Calculators for this topic
Income Tax Calculator
Work out how much income tax you owe using the latest 2025/26 UK tax bands.
National Insurance Calculator
Calculate your National Insurance contributions for 2025/26.
VAT Calculator
Add or remove VAT from any amount. Supports 20%, 5% and 0% UK VAT rates.
Corporation Tax Calculator
Calculate Corporation Tax for UK limited companies for 2025/26.
Disclaimer: The decision to incorporate depends on your specific circumstances, tax position, and business plans. This guide is general information — always consult a qualified accountant before incorporating or de-incorporating.