Sole trader or limited company: which is right for you?
It's one of the first decisions you'll make when starting a business, and one of the most common questions we're asked. There's no single right answer, but here's how the two compare.
Sole trader: simple and flexible
As a sole trader, you and your business are legally the same. You register with HMRC for Self Assessment, keep records, and pay Income Tax and National Insurance on your profits.
- Quick and free to set up, with less paperwork
- Your accounts are private, as nothing is published
- You keep all the profit, after tax
- but you're personally liable for business debts
- and higher profits can mean paying a lot of tax at higher rates
Limited company: separate and structured
A limited company is a separate legal entity, registered at Companies House. The company pays Corporation Tax on its profits, and you take money out as salary and dividends.
- Limited liability: your personal assets are generally protected if the business gets into debt
- Potential tax savings at higher profit levels, through a mix of salary and dividends
- Can look more established to some customers and suppliers
- but there's more admin: annual accounts, a Corporation Tax return, a confirmation statement and usually payroll
- and some company information is public on Companies House
How the tax compares
| Sole trader | Limited company | |
|---|---|---|
| Tax on profits | Income Tax and Class 4 National Insurance | Corporation Tax: 19% on profits up to £50,000, rising to 25% on profits over £250,000 |
| Taking money out | All profit is yours | Salary (through payroll) and dividends, which are taxed personally |
| Tax return | Self Assessment | Company Tax Return plus your own Self Assessment |
Whether a company saves you tax depends on your profit, how much you need to take out, and other income. For lower profits, the extra costs and admin often outweigh any saving. As profits grow, a company can become more tax-efficient, but the numbers need checking for your situation, as tax rates on dividends and National Insurance change from time to time.
When might it be worth switching?
- your profits are growing and you're paying higher-rate tax
- you want to leave some profit in the business rather than take it all out
- you want to protect your personal assets from business risks
- clients or contracts require you to work through a limited company
Get it right from the start
We'll compare both options using your actual figures, so you can see the difference in tax and admin before you decide. If a company is right for you, our limited company packages include setting it up at Companies House.
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This article is general guidance based on the rules in place when it was written (October 2026). Tax rules change and everyone's situation is different, so please speak to us before making decisions.