Should you go limited?
It’s the first question on your lips when you start a business in the UK - should you operate as a sole trader or register as a limited company. You may have started out as a sole trader but you’re now thinking about making the switch. It’s a big decision so let us explain the differences and what you should consider.
What is the Difference Between a Sole Trader and a Limited Company?
Being a sole trader means you are the business. There is no separate legal entity sitting between the two. That keeps things simple, and it means all the profit belongs to you. It also means that if the business owes money, you owe it personally.
A limited company is separate from you in law. It owns its assets, signs its own contracts and pays its own tax, even though you own and run it as a director and shareholder.
How is each structure taxed?
As a sole trader, you pay income tax on it at 20%, 40% or 45%, plus National Insurance at 6% on profits between £12,570 and £50,270, and 2% on anything above that. You are taxed on the full profit whether you spend it or leave it sitting in the business account.
A company pays corporation tax on its profits first. Then you take money out of the company, usually as a small salary plus dividends and pay personal tax on that. So a company means two tax bills rather than one, but each is charged at a lower rate. Whether that works out better depends almost entirely on how much money you actually take out.
The rates for 2026/27
Corporation tax on company profits:
19% on profits up to £50,000
An effective 26.5% on the slice between £50,000 and £250,000
25% on profits above £250,000
Dividend tax when you take money out:
First £500 is tax free
10.75% if you are a basic rate taxpayer
35.75% if you are a higher rate taxpayer
39.35% above that
Which one should I choose to pay less tax?
For a long time the advice was simple. Once your profits reached somewhere around £30,000 to £50,000, you set up a limited company and paid less tax. This advice no longer works reliably. With changes to employer and employee national insurance rates and dividend tax, the gap between the two structures has closed, and on some numbers a sole trader now keeps more. The figures will depend on whether you have other income sources, would qualify for the Employment Allowance and pension arrangements.
This does not mean a company is the wrong choice. It means the reasons for choosing one have changed.
So why would you still incorporate?
You do not need all the profit
If your business makes £60,000 but you only need £35,000 to live on, the leftover stays in the company having paid corporation tax and nothing else. You decide when to take it. A sole trader is taxed on the whole £60,000 either way.
Pensions
A company can pay into your pension directly and claim the cost against corporation tax, with no income tax or National Insurance on the way in. Sole traders get relief too, but through a different route with different limits.
Protecting your personal assets
If a company runs out of money, its debts generally stop at the company. A sole trader's debts do not stop anywhere. Be aware though, if you have signed personal guarantees on a loan or a lease, you are still on the hook, and it does not cover your own negligence. If your business is carrying more commercial and legal risk, it’s worth seriously considering.
Who you want to work with
Some larger clients and public sector organisations will only contract with limited companies. If you might want to bring in a business partner or sell the business one day, shares are much easier to transfer than a sole trade.
When would a sole trader be more attractive?
Less to do and less to pay for
No annual accounts to file, no corporation tax return, no confirmation statement, no payroll. Accountancy fees are usually lower. However, Making Tax Digital for Income Tax came in from April 2026 which means sole traders need to do quarterly reporting depending on their income threshold and will need to pay for software.
Privacy
Company accounts and director details appear on a public register that anyone can search (though at the moment the profit & loss statement can be removed). On the other hand, sole traders publish nothing so your financial information stays private.
Easier to change your mind
Sole trader status is likely the better starting point if you are testing a business idea and not yet sure it will be viable
Becoming a company is straightforward but closing one down again takes time, costs money and can create a tax charge depending on how it is done. Stopping a sole trade is comparatively straightforward. You would just need to tell HMRC they have stopped being self-employed, complete the relevant final Self Assessment reporting. There is no separate legal entity that has to be dissolved.
How to ultimately decide what’s right for you
Every business faces this dilemma at some point.
The tax gap between the two structures has narrowed enough that it shouldn’t be the deciding factor on its own. What matters more is how much profit you need to draw, what risk the business carries and whether you want to retain and reinvest. It is also worth revisiting every few years rather than treating the decision as permanent.
We support limited companies at Beaver & Bee Chartered Accountants but if you’re pondering whether to switch over or which structure to start with, we offer a Finance Power Hour which is a 90 minute consultation to help you decide which might be the best structure for you and what you need to be aware of. Please get in touch with us to book a call.
