Limited company vs sole trader: which suits your business?
A practical UK comparison of operating as a limited company versus a sole trader.
The choice between limited company vs sole trader shapes your tax bill, your personal risk, and how much paperwork lands on your desk every year. There is no universal answer: a freelance copywriter on £30,000 may be better off as a sole trader, while a consultant on £80,000 almost always benefits from incorporation. This guide compares the two structures across the criteria that matter most.
At-a-glance comparison
| Factor | Sole trader | Limited company |
|---|---|---|
| Legal status | You and the business are the same | Separate legal entity |
| Liability | Unlimited personal liability | Limited to share capital |
| Tax on profits | Income tax 20-45% plus Class 4 NIC | Corporation tax 19-25% |
| Profit extraction | Drawings (no PAYE) | Salary plus dividends |
| Public disclosure | None | Accounts and officers on Companies House |
| Filing burden | Self Assessment annually | CT600, accounts, confirmation statement, payroll |
| Setup cost | None | £50 incorporation fee |
| Best suited to | Side hustles, very small businesses | Profits above ~£40k, B2B clients, growth plans |
See our deeper articles on sole trader and private limited company for the underlying mechanics.
Tax in plain numbers
The tax difference grows with profit. For a 2024-25 tax year illustration on a single owner taking all profit:
| Profit | Sole trader (tax + NIC) | Ltd (CT + dividend tax + NIC) | Saving |
|---|---|---|---|
| £30,000 | ~£4,600 | ~£4,400 | ~£200 |
| £50,000 | ~£10,400 | ~£8,800 | ~£1,600 |
| £80,000 | ~£22,500 | ~£18,400 | ~£4,100 |
| £120,000 | ~£42,800 | ~£35,600 | ~£7,200 |
Figures are illustrative and do not factor in pension contributions, salary optimisation, or marginal-rate corporation tax. Always run your own numbers; HMRC’s income tax rates and corporation tax rates are the official sources.
Beyond tax: things people forget
- Liability: a sole trader is personally on the hook for trade debts, claims and contracts. Incorporation puts a legal wall between business and home.
- Credibility: many enterprise customers, banks and procurement portals only contract with limited companies.
- Funding: equity investment and EIS/SEIS reliefs require a company.
- Pension planning: employer contributions from a limited company are corporation-tax deductible and avoid NIC, often the most tax-efficient long-term move.
- Privacy: company directors’ names, dates of birth (month and year) and registered office sit on the public Companies House register.
- Switching back: it is far easier to incorporate later than to disincorporate, so do not rush the move purely on theoretical tax savings.
When to incorporate
Common triggers:
- Profits consistently above £40,000-£50,000
- Winning B2B clients that require a limited company supplier
- Hiring your first employees
- Taking on liability-heavy work or signing customer contracts at scale
- Bringing in a co-founder or external investor
For the mechanics, our switching from sole trader to limited guide walks through the transfer of trade and assets.
Closing thoughts
Most businesses start as sole traders to test the market and incorporate once profits and risk justify the extra admin. Read our first year accounts guide if you have just incorporated. See pricing for software that scales from sole trader to limited company without a re-platform.