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.
Frequently Asked Questions
Is a limited company always more tax-efficient than a sole trader?
Not always — the tax gap has narrowed as dividend tax rates and Corporation Tax have both risen, so for lower profit levels the saving from incorporating can be modest, while at higher profit levels a limited company more often produces a meaningfully lower combined tax bill. Run the actual numbers for your profit level rather than assuming.
What is the main non-tax reason to incorporate?
Limited liability protection is often the biggest non-tax factor — as a sole trader you have unlimited personal liability for business debts, while a limited company is a separate legal entity that generally limits a shareholder’s liability to what they have invested, subject to exceptions like personal guarantees.
How much more admin does a limited company involve?
Considerably more than being a sole trader — you need to file annual accounts and a confirmation statement with Companies House, keep the company’s money and records separate from your own, and often run payroll for any salary you draw, alongside more formal bookkeeping generally.
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Can I switch from sole trader to limited company later?
Yes, this is very common — many businesses start as a sole trader for simplicity and incorporate once profits grow or liability risk increases, transferring the business and its assets into a newly formed company at that point.
Do I need an accountant to run a limited company?
It is not a strict legal requirement, but given the additional filing obligations, payroll, and Corporation Tax computations involved, most limited company directors use an accountant, whereas some sole traders with simple affairs manage their own Self Assessment return without one.
Does being a limited company protect me from all business debts?
Not entirely — while limited liability generally protects personal assets from most business debts, directors can still be personally liable in certain situations, such as giving a personal guarantee for a loan, or in cases of wrongful or fraudulent trading.
What Corporation Tax rate will my company pay in 2026/27?
Companies with profits up to £50,000 pay the small profits rate of 19%, profits above £250,000 pay the main rate of 25%, and profits in between benefit from marginal relief, which tapers the rate gradually between the two thresholds.
How are dividends from my own company taxed?
The first £500 of dividend income each tax year is covered by the dividend allowance and taxed at 0%, with anything above that taxed at your marginal dividend rate on top of any salary and other income, so timing and amount of dividends both affect your overall bill.
Do sole traders and company directors pay National Insurance differently?
Yes — sole traders pay Class 4 National Insurance on their profits through Self Assessment, while a director drawing a salary through the company has employee National Insurance deducted via PAYE, and the company itself may owe employer National Insurance on that salary, subject to the Employment Allowance for eligible small employers.
Is a limited company worth it for a very small or part-time business?
Often not — for modest profit levels the tax saving from incorporating can be small once the extra accountancy and administrative costs are factored in, so many part-time or low-profit businesses are better served staying as a sole trader until profits or liability risk grow.
Disclaimer: This guide reflects UK rules as they generally apply in 2026/27. This guide is for general information only and is not professional advice. Consult a qualified adviser and refer to gov.uk for current official guidance before relying on any treatment.
