Start as a sole trader unless you have a concrete reason to incorporate. On 2026/27 rates, the tax argument that used to settle this is gone for a one-person business drawing all its profit.
You keep more as a sole trader at £30,000 and £90,000 of profit, and land within £20 either way at £60,000.
So the real question isn’t how much you need to earn before you go limited. It’s whether you need the liability protection, the credibility with bigger clients, or the outside funding a company brings.
We work through the tax first, because that’s what most people ask about, then the reasons that actually decide it.
- Tax (2026/27): near-identical for a typical owner, and often better as a sole trader.
- Liability: a limited company protects your personal assets, unless you sign a personal guarantee.
- Admin: a sole trader files one tax return; a company files accounts, a confirmation statement and more.
- Privacy: a company’s directors and address are public; a sole trader’s are not.
- Credibility and funding: some clients and lenders prefer a limited company.
- Cost: staying a sole trader is free; incorporating costs £100.
Sole Trader vs Limited Company at a Glance
If you read nothing else, we’ve put the whole decision on one screen. The tax row uses the current 2026/27 rates, not the older ones most pages still quote.
| Factor | Sole trader | Limited company |
|---|---|---|
| Tax (2026/27) | Often keeps more at typical profits | No longer cheaper for most single owners |
| Liability | You’re personally liable for debts | Limited, unless you give a personal guarantee |
| Admin | One Self Assessment return a year | Accounts, confirmation statement, plus Self Assessment |
| Privacy | Your details stay off the public register | Directors, address and owners are public |
| Credibility | Fine for most; less so with big clients | Often preferred by clients and lenders |
| Setup cost | Free to register with HMRC | £100 to incorporate with Companies House |
| Verified against GOV.UK, 6 July 2026. 2026/27 rates, England, Wales and Northern Ireland. | ||
The Short Answer: Sole Trader or Limited Company?
We’d stay a sole trader if you’re testing an idea, your profit is modest, and you’re comfortable being personally on the hook. It’s simpler, cheaper, and in 2026 usually leaves you with as much or more after tax.
The case for going limited gets stronger once the risk climbs, once a client or lender expects it, or when you want the company name and the separation it brings. That trigger, not the tax bill, is what should move you now.
| Your situation | Usually the better fit |
|---|---|
| Testing an idea, low profit, low risk | Sole trader |
| You want your personal assets ring-fenced | Limited company |
| Clients or lenders expect a limited company | Limited company |
| You want your details kept off the public register | Sole trader |
| Higher profits and you don’t need all the cash | Limited company (take advice on pensions) |
| Verified against GOV.UK, 6 July 2026. 2026/27 rates, England, Wales and Northern Ireland. | |
What Sole Trader and Limited Company Mean
A sole trader is you, trading as yourself. There’s no legal line between you and the business: its income is your income, and its debts are your debts. You register with HMRC for Self Assessment, and that’s largely it.
A limited company is a separate legal person that you own and run. It earns its own money, pays its own Corporation Tax, and you take money out as salary and dividends. That separation is the whole point, and the source of most of the differences below.
Sole Trader vs Limited Company: Pros and Cons
Neither wins outright; it turns on what you’re optimising for, so we’ve set out what you gain and give up on each side.
| Structure | Main upside | Main downside |
|---|---|---|
| Sole trader | Simple, cheap, private, and often lower tax in 2026 | You’re personally liable, and less credible to some clients |
| Limited company | Limited liability, credibility, and name protection | More admin and cost, and no longer a tax saving for most |
| Verified against GOV.UK, 6 July 2026. 2026/27 rates, England, Wales and Northern Ireland. | ||
The Tax Difference Between Sole Trader and Limited Company
The two are taxed in completely different ways. As a sole trader, the profit your invoices bring in is simply your income: you pay income tax and Class 4 National Insurance on it, 20% then 40% as it climbs, plus 6% NI between £12,570 and £50,270. There’s no second layer.
A company pays Corporation Tax on its profit first: 19% up to £50,000, then a 26.5% marginal band above that.
Then you pay dividend tax when you take the money out, at 10.75% or 35.75% after a £500 allowance. Since the 2025 Budget raised dividend tax, that second layer bites harder than it used to.
You also lose a chunk to employer National Insurance on a director’s salary, at 15% above £5,000, with no Employment Allowance if you’re the only employee. Stack it up and the old company advantage has mostly gone.
For you as a sole trader, that’s the whole tax bill in one layer: no dividend decision, no payroll to run, and nothing to file beyond your Self Assessment return.
Sole Trader vs Limited Company Tax Examples
We ran the same profit through both routes for a single owner drawing everything as pay, the way you would in practice. These are 2026/27 figures; your own numbers will differ, and an accountant can often improve the company side with pensions or income-splitting.
| Annual profit | Sole trader take-home | Limited company take-home | Difference |
|---|---|---|---|
| £30,000 | £25,468 | £24,403 | Sole trader keeps £1,065 more |
| £60,000 | £46,111 | £46,091 | Line ball |
| £90,000 | £63,511 | £60,487 | Sole trader keeps £3,024 more |
| Verified against GOV.UK, 6 July 2026. 2026/27 rates, England, Wales and Northern Ireland. | |||
Read down the last column and it’s the same story each time: at these levels a limited company doesn’t save a single owner tax in 2026, and can cost more.
Sit down with your accountant at year-end and run your own figures both ways: for a single owner drawing everything, they tend to land within a few pounds of each other, which is not what the £90,000 headline you’ll see elsewhere would lead you to expect.
Where we’d still reach for a company is when you don’t need all the cash. You can leave profit in it, or pay into a pension, and defer or avoid the dividend tax. But for most owner-managers drawing everything, the tax case for incorporating has gone.
What Limited Liability Does and Does Not Protect
Limited liability is the strongest reason to incorporate. If the company runs up debts it can’t pay, your house and savings are usually safe: the company is a separate person, so it’s the company on the hook, not you.
The catch is the personal guarantee. Picture a landlord sliding one across the desk before handing over the keys, or a lender asking for it before they release funds: sign, and your home is back on the line for that debt.
So limited liability is real, but it isn’t absolute. Read what you sign.
Admin, Filing and Running Costs
As a sole trader you file one Self Assessment return a year and keep basic records. That’s the whole obligation, and plenty of people do it themselves.
A limited company is more work: annual accounts, a confirmation statement, a Corporation Tax return, and usually a Self Assessment for you as a director. Most owners pay an accountant a few hundred pounds a year to handle it, which quietly eats into any tax difference.
You feel that gap when the January Self Assessment deadline comes round. A sole trader files one return; as a director you’re also signing off statutory accounts and a Corporation Tax return on their own deadlines. That’s why most owners hand the lot to an accountant.
Privacy, Credibility, Clients and Funding
A limited company is public. Your name, your registered office and anyone who owns more than a quarter of the shares appear on the open register, which is why some founders use a service address to keep their home off it. A sole trader’s details stay private.
On the other side, a limited company can open doors. Larger clients, agencies and lenders sometimes prefer or require one, and incorporating protects your company name. If credibility or funding is the goal, that can matter more than the tax.
It shows up in practice: a larger client’s procurement team runs its checks, sees a sole trader, and the same week asks you to invoice through a limited company before it will add you to its supplier list. When that decides the contract, the tax comparison stops mattering.
When to Switch From Sole Trader to Limited Company
There’s no magic profit figure any more, because the tax saving that used to justify switching has largely gone. Switch when the reason is real: your risk has grown, a big client insists on it, you’re raising money, or you want your personal assets protected.
If tax is the only thing tipping you, in 2026 the answer is usually not yet. We’d revisit it with an accountant once your profit climbs and you can leave money in the company rather than drawing it all.
How to Register as a Sole Trader or Limited Company
Registering as a sole trader means telling HMRC you’re self-employed and filing Self Assessment. There’s no fee.
Registering a limited company means incorporating with Companies House for £100, usually approved within a day. Our guide to registering a limited company walks the whole process, and the company name checker tells you fast whether your name is free.
Sole Trader vs Limited Company Frequently Asked Questions
Is a limited company more tax-efficient than a sole trader?
Not for most single owners in 2026/27. Once you account for the higher dividend tax, employer National Insurance and the marginal Corporation Tax band, a sole trader often keeps more of the same profit. A company can still win if you leave profit in it or use pension contributions, so it’s worth checking with an accountant.
Can I switch from sole trader to limited company later?
Yes, and many people do. You keep trading, incorporate a company with Companies House, move the business across and tell HMRC. You don’t have to decide forever on day one.
Do I pay more tax as a sole trader?
Not usually, on the 2026/27 numbers. At £30,000 and £90,000 of profit a sole trader keeps more than a single-owner company taking all its profit as pay; at £60,000 they’re about level.
Is my personal money at risk as a sole trader?
Yes. As a sole trader there’s no legal separation, so you’re personally liable for the business’s debts. A limited company protects your personal assets, unless you’ve signed a personal guarantee.
Do sole traders show up on a public register?
No. A sole trader’s details aren’t published in the same way. A limited company’s directors, registered office and significant owners appear on the open Companies House register.
How We Worked Out the Tax
What this covers. A plain-English comparison of sole trader and limited company for a UK owner-manager: tax, liability, admin, privacy, and when to switch.
What we checked. The tax figures were verified against GOV.UK on 6 July 2026 for the 2026/27 tax year (England, Wales and Northern Ireland; Scotland differs on income tax).
Key rates used: income tax 20% and 40%, Class 4 NI 6% and 2%, Corporation Tax 19% with a 26.5% marginal band, and dividend tax 10.75% and 35.75% after a £500 allowance.
How the examples work. Each worked example assumes a single owner taking all profit as pay, with a company salary of £12,570 plus dividends.
Advanced planning such as pension contributions, splitting shares with a spouse, or retaining profit can change the company figure. This is general information, not personal tax advice.