Self-Employment Guide · Updated July 2026
Sole Trader vs Limited Company 2026/27
Choosing between operating as a sole trader or setting up a limited company affects your tax bill, personal liability, and how much paperwork you take on. This guide compares both structures for 2026/27 to help you decide which suits your business.
Tax and National Insurance
As a sole trader, you pay Income Tax and Class 4 National Insurance on your business profits directly through Self Assessment, at your personal marginal rates. As a limited company, the company itself pays Corporation Tax on its profits, and you separately pay tax on whatever salary and dividends you draw from the company, often at a lower combined rate for similar profit levels, particularly once profits rise above a certain threshold.
The tax gap between the two structures has narrowed over recent years as dividend tax rates and Corporation Tax have both increased, so the tax saving from incorporating is smaller for many small businesses than it once was, and is not the only factor that should drive the decision.
Liability and Administration
A sole trader has unlimited personal liability for business debts, meaning personal assets can potentially be at risk if the business cannot pay what it owes, whereas a limited company is a separate legal entity, so a shareholder’s liability is generally limited to what they have invested (subject to exceptions such as a personal guarantee).
Running a limited company brings significantly more administration: filing accounts and a confirmation statement with Companies House, keeping the company’s finances separate from personal finances, potentially running payroll for a director’s salary, and generally needing more formal bookkeeping than a sole trader typically requires.
Making the Decision
Businesses with modest profits, low risk of significant debt, and a preference for simplicity often stay as sole traders, at least initially, while those with higher and growing profits, meaningful liability risk, or plans to bring in investors or build a sellable asset often find incorporating worthwhile despite the extra administration.
It is entirely possible, and common, to start as a sole trader and incorporate later once the business grows, so the decision does not need to be permanent — many advisers suggest reviewing the comparison annually as profits and circumstances change.