Choosing between a sole trader and a limited company comes down to three things: liability, tax and paperwork. A sole trader is personally liable for every business debt and pays income tax and Class 4 National Insurance on all profits, at rates of 20%, 40% and 45% plus 6% (and 2% above £50,270). A limited company is a separate legal person: it pays corporation tax at 19% to 25%, and its owners pay tax again only on what they take out. After the April 2026 rise in dividend tax to 10.75% and 35.75%, a company is no longer an automatic tax saving when every pound is withdrawn. The real advantage now comes from profit left inside the company.
The core difference: who owns the debts
As a sole trader, you and the business are the same legal person. GOV.UK puts it plainly: you are "personally responsible for all of the debts of the business". Your house, savings and car stand behind every supplier invoice, lease and claim. Setting up is almost frictionless. You register for Self Assessment once your trading income goes above £1,000 in a tax year, and there is nothing to file at Companies House.
A private limited company is legally separate from its owners. Shareholders are responsible for the company's debts "only up to the value of their financial investment". That protection is real but narrower than people assume. Banks and landlords routinely ask directors for personal guarantees. Directors can also become personally liable for wrongful trading once insolvency is unavoidable (the wrongful trading rules). Limited liability protects against ordinary commercial failure. It does not protect against signing guarantees or trading on regardless. Our guide to private limited company advantages and disadvantages covers the trade-offs in more detail.
How each is taxed in 2026/27
The figures below use the 2026/27 income tax rates and dividend tax rates published by HMRC.
| Item | Sole trader | Limited company |
|---|---|---|
| Tax on business profit | Income tax on all profit: 20% (£12,571–£50,270), 40% (to £125,140), 45% above | Corporation tax: 19% up to £50,000, 25% above £250,000, marginal relief between |
| National Insurance | Class 4: 6% on £12,570–£50,270, 2% above | On salary only: employer 15% above £5,000; employee 8% above £12,570 (2% above £50,270) |
| Taking money out | No further tax: profit is already taxed | Dividends: £500 allowance, then 10.75% / 35.75% / 39.35% |
| Main filings | Self Assessment return | Accounts to Companies House, Company Tax Return (CT600), confirmation statement, payroll |
The sole trader is taxed on profit whether or not the money is drawn. The company is taxed twice on money that is withdrawn: corporation tax first, then dividend tax in the shareholder's hands. The difference is timing and control. A company can leave profit in the business at corporation tax rates and decide later when, and how, to extract it.
A worked comparison (illustration only)
The figures below are our own arithmetic, not HMRC figures. They assume England, a 12-month accounting period, no associated companies and no other income. They also assume a single director-shareholder on a £12,570 salary, with all post-tax profit paid out as dividends in the same year. A company whose only paid employee is a single director cannot claim the £10,500 Employment Allowance, so employer National Insurance is payable on the salary above £5,000. Pensions, accountancy fees and student loans are ignored.
| Annual profit | Sole trader take-home | Company take-home (all profit extracted) |
|---|---|---|
| £60,000 | £46,111 | £46,091 |
| £100,000 | £69,311 | £65,210 |
At £60,000 the two structures are level. At £100,000 the sole trader keeps more, because corporation tax with marginal relief plus 35.75% dividend tax costs more than 40% income tax plus 2% Class 4. This reverses the old rule of thumb that incorporation always pays above a modest profit level. The picture changes sharply if the owner does not need all the profit. In the £100,000 example, if the director needs only £50,000 a year, everything above that is taxed at corporation tax rates for now, against 40% plus 2% for the sole trader. Employer pension contributions, which reduce company profits and attract no National Insurance, make the gap wider still.
Running costs and obligations
A company brings fixed obligations a sole trader avoids:
- Companies House. Incorporation costs £100 online, and a confirmation statement is due every year (£50 online). Directors and people with significant control must verify their identity with Companies House. The requirement started on 18 November 2025: new directors verify on appointment, and existing directors by the company's next confirmation statement;
- Accounts. Statutory accounts are due at Companies House nine months after the year end, and are publicly visible;
- Corporation tax. The tax is normally payable nine months and one day after the period end, and the Company Tax Return is due 12 months after it;
- Payroll. Any salary, including the director's own, runs through PAYE with real-time submissions;
- Money is not yours. Company cash is not drawings: it leaves as salary, dividends or a director's loan. An overdrawn loan account not repaid within nine months of the year end triggers a section 455 charge, now 35.75% on loans made from 6 April 2026 (see section 455 explained).
Sole traders are not entirely spared. From 6 April 2026, sole traders and landlords whose combined turnover (qualifying income) was over £50,000 in 2024/25 must use Making Tax Digital for Income Tax and send quarterly updates. The threshold falls to £30,000 from April 2027 and £20,000 from April 2028. For a sole trader near those levels, the difference in admin between the two structures is smaller than it used to be (see MTD for sole traders).
Moving from sole trader to limited company
Incorporating an existing business is a transfer of assets, not a change of label. The sole trade ceases, which triggers final-year rules on the Self Assessment side. The company then needs its own bank account, contracts in its own name, VAT registration if it is registered, and its own payroll. Goodwill and other assets transferred to the company can create capital gains, and relief may be available. Where property is involved, see our note on incorporation relief. Customers, insurers and lenders must be told that the contracting party has changed. Get advice before the transfer date, not after it.
Which suits you?
- Stay a sole trader if profits are modest, you draw everything you earn, and the business carries little liability risk. It is simpler, cheaper and private;
- Consider a company if you expect to keep profits in the business, want to bring in investors or co-owners, face meaningful liability exposure, or deal with clients who will only contract with a limited company;
- Model it either way. Pension contributions, a spouse's involvement, other income and the profit you actually need each year all move the answer. A generic threshold will not.
If you are weighing the switch, Acumon can model both structures on your real numbers. We can also handle incorporation through our company formation team. For ongoing compliance on either side, see our accountants for sole traders and limited company services.