Whether to operate as a sole trader or form a limited company is one of the most common questions for anyone starting or growing a business in the UK. The right answer depends on your profit level, your attitude to admin, and factors beyond tax alone. Here's a clear-eyed look at both options for 2025/26.
How each structure is taxed
Sole trader: Your business profits are your personal income. You pay income tax on profits above the £12,570 personal allowance (20% basic rate, 40% higher rate, 45% additional rate), plus Class 4 National Insurance (6% on profits between £12,570 and £50,270, and 2% above that).
Limited company: The company pays corporation tax on its profits — 19% on profits up to £50,000, rising to 25% on profits above £250,000, with marginal relief in between. You then extract money from the company, typically as a combination of salary (taxed via PAYE) and dividends (taxed at lower dividend rates: 8.75% basic, 33.75% higher, 39.35% additional, after a £500 dividend allowance).
At what profit level does a limited company become more efficient?
At lower profit levels — say, below £30,000 — the tax saving from incorporation is often modest and may not justify the additional costs and admin. Corporation tax at 19% might sound much better than income tax at 20%, but once you factor in the dividend tax you'll pay when extracting profits, the effective rate converges.
As profits grow above £40,000–£50,000, the gap typically widens. A director taking a low salary (often set at the employer NI secondary threshold of £5,000, or at the personal allowance of £12,570 depending on the company's tax rate) and topping up with dividends can pay significantly less in combined corporation tax and dividend tax than a sole trader paying income tax and NI on the same profit. The crossover point varies depending on circumstances — including whether you need to draw all profits or can leave some in the company.
Quick comparison
| Sole Trader | Limited Company | |
|---|---|---|
| Tax on profits | Income tax + Class 4 NI | Corporation tax (19–25%) |
| Tax on drawings | N/A (profits = income) | PAYE on salary + dividend tax |
| Personal liability | Unlimited | Limited to share capital |
| Annual admin | 1 Self Assessment return | Annual accounts, CT600, confirmation statement, payroll |
| Privacy | Accounts are private | Accounts filed publicly at Companies House |
| Losses | Can offset against other income | Carried forward against future profits |
| Setup cost | Free (just register with HMRC) | ~£50 at Companies House + ongoing accountancy |
The case for staying a sole trader
Simplicity is genuinely valuable. As a sole trader, you file one Self Assessment return per year. There's no payroll, no separate company bank account obligation, no annual accounts to file at Companies House, no confirmation statements, and no corporation tax return (CT600). Your financial affairs stay private.
If you're just starting out, or your profits are modest, sole trader status lets you focus on building the business rather than managing administration. And if things don't work out, winding up is straightforward — there's no formal liquidation process.
The case for incorporating
Beyond the potential tax saving at higher profit levels, a limited company offers genuine limited liability — your personal assets are protected from business debts in most circumstances. This matters more in some industries than others.
A limited company can also retain profits within the company at the corporation tax rate, only extracting them when personally advantageous. If your business has variable income, this flexibility to time your drawings can be valuable. Some clients — particularly larger companies and public sector organisations — also prefer or require their suppliers to be limited companies.
Don't forget the running costs
A limited company without an accountant is a risky proposition for most people. Budget for accountancy fees of at least £1,000–£2,000 per year for a simple one-director company — more if you want active tax planning. These are allowable business expenses, but they're real costs that reduce the headline tax saving from incorporation.
The net tax saving needs to comfortably exceed these additional costs to make incorporation worthwhile. At profits of £30,000–£40,000, it often doesn't. Above £60,000, it usually does — sometimes significantly.