Sole trader vs limited company: which is better?
By Kaiser Khan · Updated · 7 sources checked
Sole trader vs limited company: side by side
| Feature | Sole trader | Limited company |
|---|---|---|
| Legal status and liability | Not separate from you; you are personally responsible for all business debts | Separate legal entity; owners liable only up to their investment |
| Setting up | Start trading straight away; register for Self Assessment once earnings pass £1,000 | Register at Companies House before trading; £100 online fee |
| Tax on profits | Income Tax at 20%, 40% or 45% above the £12,570 Personal Allowance (2026/27) | Corporation tax: 19% up to £50,000, 25% over £250,000, marginal relief between |
| Taking money out | You keep all the profits after paying tax | Salary via payroll, or dividends taxed 10.75%–39.35% above £500 (2026/27) |
| National Insurance | Class 4: 6% on profits £12,570–£50,270, 2% above (2026/27) | Employee and employer Class 1 on salary; none on dividends |
| Yearly filing | A Self Assessment tax return to HMRC | Annual accounts, confirmation statement (£50 online) and a Company Tax Return |
| What's public | Nothing filed at Companies House | Accounts, plus directors' names, nationality and month and year of birth |
| Accountant fees | £39–£89 a month on our benchmarks | £83–£227 a month on our benchmarks |
| Who it suits | Simpler, lower-risk businesses where the owner draws most of the profit | Owners who want limited liability or to keep profits in the business |
What is the main difference between a sole trader and a limited company?
The main difference is legal status. A sole trader is not separate from the business, so the owner is personally responsible for all its debts. A limited company is legally separate from the people who own it, so the owners are responsible for its debts only up to the value of their investment.
As a sole trader you make the decisions and keep all the profits after tax. You can start trading straight away. You must register for Self Assessment with HMRC once you earn more than £1,000 in a tax year. A limited company must be registered at Companies House before it starts trading. It needs at least one director and at least one shareholder, and one person can be both. Money the company earns belongs to the company, so there are rules for taking it out. Limited liability also comes with duties. Directors must keep company records and file accounts and tax returns. If you hire an accountant, you are still legally responsible for them. Failing to meet these duties can lead to a fine, prosecution or disqualification as a director.
How is a sole trader taxed compared with a limited company?
A sole trader pays Income Tax and Class 4 National Insurance on business profits through Self Assessment. A limited company pays corporation tax on its own profits, at 19% to 25% from 1 April 2026. The owners then pay personal tax on what they take out as salary or dividends.
For 2026/27, sole trader profits above the £12,570 Personal Allowance are taxed at 20%, then 40% and 45% as they rise through the bands. Scotland has different Income Tax bands. Class 4 National Insurance is 6% on profits over £12,570 up to £50,270, and 2% above that. A company with profits of £50,000 or less pays the 19% small profits rate. Profits over £250,000 pay 25%, and marginal relief applies in between. These limits are reduced for short accounting periods and for associated companies. Salary is paid through payroll, with Income Tax and National Insurance above set thresholds. Dividends are paid from profits and carry no National Insurance. For 2026/27 they are taxed at 10.75%, 35.75% or 39.35%, depending on your band, after a £500 dividend allowance.
When does a limited company make more sense than being a sole trader?
There is no official profit level at which a limited company becomes the right choice. A company tends to suit owners who want limited liability, or who make enough profit to leave some in the business. Being a sole trader tends to suit simpler businesses where the owner takes out most of the profit.
Tax is only part of the decision. Profits kept in a company pay corporation tax, and the owner pays personal tax only when the money is taken out. If you take everything out, you pay corporation tax first and then personal tax on your salary or dividends. So compare the combined bill, not the headline rates. A company also adds running costs. Registration costs £100 online, and the confirmation statement costs £50 online. Accountancy is the larger ongoing cost. On our benchmarks, accountants charge sole traders £39–£89 a month and limited companies £83–£227 a month. Work through your own figures with a calculator first. Then check them with an accountant before you switch, because the answer depends on your profit, how much you need to draw and your other income.
What paperwork does each structure involve?
A sole trader keeps business records and files a Self Assessment tax return each year. A limited company files annual accounts and a confirmation statement with Companies House, and a Company Tax Return with HMRC. Company directors and people with significant control must also verify their identity with Companies House.
Sole traders must keep records from the time they start trading. HMRC uses the Self Assessment return to work out the Income Tax and National Insurance due. A sole trader files nothing at Companies House. A company's accounts go on the public record. So do each director's name, nationality and month and year of birth. A director's home address is kept on a private register. A company must also identify its people with significant control, such as major shareholders, when it registers. If the company pays a salary, including to its director, it must register as an employer and run payroll. Corporation tax payment and filing dates run from the company's own year end, not a single national date. See our pages on corporation tax deadlines and confirmation statements for the detail.
People also ask
When should a sole trader switch to a limited company?
There is no official profit level for switching. It is worth reviewing when your profits move into the 40% higher rate band, which starts above £50,270 in 2026/27, when you want to keep profits in the business, or when you need limited liability. Compare the full tax bill and the extra running costs before you decide.
Do you pay less tax as a limited company?
Not always. A company pays corporation tax on its profits, and you then pay Income Tax on the salary or dividends you take out. Dividends carry no National Insurance, but for 2026/27 they are taxed at 10.75%, 35.75% or 39.35%, so the result depends on your profit and how much you draw.
Is a sole trader personally liable for business debts?
Yes. A sole trader is personally responsible for all the debts of the business. Owners of a limited company are responsible for its debts only up to the value of their investment.
How much does it cost to set up a limited company?
Registering online with Companies House costs £100, and the confirmation statement costs £50 online. Accountancy is the bigger ongoing cost: £83–£227 a month for a limited company on our benchmarks, against £39–£89 a month for a sole trader.
Can a limited company have just one person?
Yes. A company limited by shares needs at least one director and at least one shareholder, and the same person can be both.
Can I start as a sole trader and become a limited company later?
Yes. You register the new company at Companies House, then tell HMRC you have stopped trading as a sole trader and send a final Self Assessment return by the deadline. Get advice on moving contracts, assets and any VAT registration across.
Sources
- GOV.UK: set up a business (choose a legal structure) · checked 2026-10-21
- GOV.UK: Income Tax rates and Personal Allowances · checked 2026-10-21
- GOV.UK: Self-employed National Insurance rates · checked 2026-10-21
- HMRC: Rates and allowances: Corporation Tax · checked 2026-10-21
- GOV.UK: Tax on dividends · checked 2026-10-21
- Companies House: Companies House fees · checked 2026-10-21
- Pick My Accountant fee methodology (editorial benchmarks) · checked 2026-10-21
This article is general information for UK businesses, not tax, legal, or financial advice, and thresholds change — confirm current rules on GOV.UK or with a qualified accountant before acting. Fee figures are indicative benchmarks from ourmethodology.