Sole trader vs limited company: which should you choose?

It’s the first real decision every new business owner faces, and it’s usually overthought. Most of the advice online is either an accountant’s disclaimer or a formation agent’s sales page, and both have an interest in the answer.

Here’s the honest version, with the actual numbers.

One note first: every figure here is for the 2026/27 tax year (6 April 2026 to 5 April 2027) and was checked against GOV.UK on 20 July 2026. Rates move every April and sometimes mid-year. Dividend rates in particular changed recently in a way that invalidates a lot of older comparisons. Sources are at the end.

The short answer

If you’re earning under roughly £30,000 profit, or you’re still finding out whether the idea works, be a sole trader. The tax difference is small or nonexistent, and the admin difference is large.

If you’re consistently profitable, carrying real financial risk, or need a company for credibility with the clients you want, a limited company starts to earn its keep.

Between those two it genuinely depends, and it depends on details only you have. That isn’t a cop-out. By the end of this you’ll know which details matter.

Sole trader: simple by design

As a sole trader, you are the business. There’s no legal separation between you and it.

You can start trading straight away without registering. You register for Self Assessment once you earn more than £1,000 in a tax year, and that £1,000 is measured on income before expenses, not on profit.

The good: almost no setup, and it’s free. One tax return a year. Your name and address stay off any public register. If you stop, you just stop.

The catch: you’re personally liable for the business’s debts. If it owes money it can’t pay, that’s your money. And once profits are steady, you may pay more tax than you would through a company.

Best for: side hustles, freelancers starting out, anyone testing whether an idea has legs.

Limited company: more protection, more admin

A limited company is a separate legal person. It owns its own money, signs its own contracts, and its debts are its own.

The good: limited liability, so your personal assets are generally protected. More credibility with some clients, particularly larger ones. And flexibility in how you pay yourself, because you can combine a salary with dividends rather than being taxed on everything as income.

The catch: three separate annual obligations instead of one, Corporation Tax to pay, and your details on a public register anyone can search.

Best for: businesses making consistent profit, anyone carrying real financial risk, or those who need the credibility.

What “limited liability” actually protects

It’s the most quoted advantage and the most misunderstood.

Limited liability means that if the company fails owing money, creditors can generally only take what’s in the company. Your personal savings are separate.

But it isn’t a force field.

Personal guarantees cancel it. Banks and landlords know exactly what limited liability is, which is why they routinely ask a director to personally guarantee a loan or a lease. Sign one and you’re liable for that debt anyway.
It doesn’t cover your own negligence. If you’re personally negligent you can be personally liable, company or not. That’s what professional indemnity insurance is for, and for a freelancer it’s often the more relevant protection.
Directors have duties. Continuing to trade while knowingly insolvent, for instance, can make a director personally liable.

For a freelance copywriter with no stock, no premises and no staff, the practical financial risk is small, and limited liability solves a problem they don’t have yet. For someone signing a lease, buying £15,000 of stock on credit, or working on sites where things can go badly wrong, it’s the whole argument.

The tax comparison, properly

This is what people come for, so let’s do it with real numbers.

As a sole trader

You pay Income Tax and Class 4 National Insurance on your profit:

Band	Profit	Income Tax	Class 4 NI
Personal allowance	Up to £12,570	0%	0%
Basic rate	£12,571 to £50,270	20%	6%
Higher rate	£50,271 to £125,140	40%	2%
Additional rate	Over £125,140	45%	2%

Class 2 National Insurance is worth understanding, because it’s widely misreported. It was not abolished. It stopped being compulsory. At £7,105 of profit or more it’s treated as paid, so you get the National Insurance record towards your State Pension without a bill. Below that you owe nothing either, but you can pay it voluntarily at £3.65 a week to avoid a gap in your record.

As a limited company

The company pays Corporation Tax on its profits: 19% up to £50,000 and 25% above £250,000, with Marginal Relief tapering the effective rate between the two.

Then you pay personal tax on whatever you take out. Most one-person companies take a small salary plus dividends, and dividends have their own rates. This is the part that changed:

	2026/27
Dividend allowance	£500 tax-free
Basic rate	10.75%
Higher rate	35.75%
Additional rate	39.35%

The first two went up in April 2026. They were 8.75% and 33.75%. If you’re reading a salary-versus-dividends comparison written before then, and most of the ones ranking well were, its conclusion may no longer hold. The gap between the two structures narrowed.

So where’s the crossover?

Higher than it used to be, and it moved recently.

The old rule of thumb put it somewhere around £30,000 to £50,000 of profit. That range was built on dividends being taxed at 8.75% in the basic rate band. At 10.75%, the sole trader case holds up longer than it did.

I’m deliberately not giving you a precise figure, because an honest one doesn’t exist. It depends on:

How much you take out. The company advantage is largest when you can leave profit in the company rather than drawing all of it. If you need every pound to live on, most of the theoretical saving disappears.
Whether you have other income. A job, a pension or property income moves you into different bands and changes everything.
Your salary and dividend split, and how the employer National Insurance position works out for a sole director.
The running costs. Accountancy for a company typically runs several hundred pounds a year more than for a sole trader, plus £50 a year for the confirmation statement. A £600 tax saving that costs £700 in fees is not a saving.

That last one gets forgotten constantly. Run the tax comparison, then subtract what the structure costs to operate.

This is the specific question worth paying an accountant for. An hour of their time with your real numbers beats any article, including this one. It’s one of the few pieces of advice that reliably pays for itself.

The admin difference is bigger than the tax difference

For most people at the deciding point this matters more than the tax, and it gets discussed less.

As a sole trader you have one annual obligation: a Self Assessment return by 31 January.

As a limited company you have three, plus your own:

Annual accounts to Companies House. First accounts are due 21 months after incorporation; after that, 9 months after your accounting year end.
A confirmation statement each year, £50 online, confirming your registered details are still correct.
A Company Tax Return, with Corporation Tax paid before the return is due. That’s the opposite way round to Self Assessment, and it catches out a lot of first-year directors.
Your own Self Assessment, because you still have personal income.

None of these are hard. But they’re four deadlines instead of one, each carrying penalties, and they don’t pause because you had a busy quarter. Most company directors end up paying an accountant, and that cost belongs in the comparison.

The privacy difference

A limited company goes on a public register. Anyone can look up your company and see your name, your role, your month and year of birth, the registered office address and your accounts.

If you register the company at your home, your home address is on a public register, searchable by anyone, including customers you’d rather not have it. This is a common regret. A registered office service is inexpensive and worth arranging before you file, not after.

Directors and people with significant control also have to verify their identity with Companies House. That became a legal requirement on 18 November 2025.

Sole traders have none of this. Your details stay between you and HMRC.

What about VAT?

Nothing changes. VAT isn’t connected to your business structure at all, and this confusion comes up constantly.

You must register for VAT when your taxable turnover over any rolling 12 months goes over £90,000, or when you expect to pass £90,000 in the next 30 days alone. That applies to a sole trader and a limited company identically.

The rolling part is what catches people. It isn’t measured against your tax year or your accounting year. It’s any twelve consecutive months, checked continuously.

A rough rule of thumb

Many people start as a sole trader to keep things simple, then switch to a limited company once profits are steady and predictable. That’s a sensible sequence, and switching later is straightforward.

Signals it’s worth looking at properly:

Profit has been consistently above roughly £30,000 for a year or more, and you’re not drawing all of it
You’re about to sign a lease, take stock on credit, or hire someone
Clients you want are asking whether you’re a limited company
You’re carrying risk that would genuinely hurt you personally

Signals it isn’t:

You’re doing it because someone said it looked more professional
Your profit is under £30,000
You’d need every pound out of the company to live on
You’re not confident you’ll still be doing this in a year

There’s no wrong first choice. You can change later, and plenty of people do.

The thing that matters more than the structure

Whichever you pick, the businesses that survive are the ones that know their numbers. Sole trader or limited company, you need to know what you’ve earned, what you’ve spent, and what’s actually profit, not just what’s in the bank.

That’s also what makes this decision answerable. The reason so many people can’t work out whether to incorporate is that they don’t know their real profit, so there’s nothing to run the comparison on.

Sedonis tracks exactly that from day one: invoices, expenses and real profit, in one private app that’s free to start. When it’s time to file, or to decide whether to go limited, the numbers are already there.

Next steps

Ready to register? Here’s how to register as self-employed and how to set up a limited company step by step.

Want the tax on your own profit? The self-employed tax calculator does the sole trader side in a few seconds.

Starting from scratch? How to start a business in the UK is the full nine-step guide, and this decision is step two of it.

Figures checked against GOV.UK on 20 July 2026, for the 2026/27 tax year: Income Tax rates, self-employed National Insurance, tax on dividends, Corporation Tax rates, VAT thresholds, Companies House fees, set up as a sole trader. Rates change, usually each April.

General information, not financial or legal advice. The crossover point between the two structures depends on numbers specific to you, and this is one of the few decisions where an hour with an accountant reliably pays for itself.