It is the first real decision most people face when starting a business in the UK, and it gets overthought more than almost any other. Sole trader or limited company?
The honest answer is that for most people starting out, it matters less than they fear — and you are not locked in. Thousands of UK businesses start as sole traders and incorporate two years later when the numbers justify it. That is a normal progression, not a mistake being corrected.
But the two structures genuinely differ in four ways that matter: what happens if the business owes money it cannot pay, how much tax you hand over, how much administration you take on, and how you look to the people you want to sell to. This guide works through each, then gives you a practical rule for deciding.
The short comparison
| Sole trader | Limited company | |
|---|---|---|
| Legal status | You are the business | A separate legal entity you own shares in |
| Liability | Unlimited — personal assets at risk | Limited to what you have put in, with exceptions |
| How you are taxed | Income tax and National Insurance on all profit | Corporation tax on profit, then tax on salary and dividends you draw |
| Registration | Register for Self Assessment with HMRC | Incorporate at Companies House |
| Public accounts | None — your figures stay private | Accounts and directors filed publicly |
| Typical accountancy cost | £0 – £600 a year | £800 – £2,000+ a year |
| Raising investment | Very difficult — no shares to sell | Straightforward — investors take equity |
| Paying yourself | Take money out freely | Salary and dividends, properly documented |
Liability: the difference that actually bites
This is the one people underestimate, because it never matters until it suddenly matters a great deal.
As a sole trader you and your business are the same legal person. Business debts are your debts. If a supplier goes unpaid, a client sues, or a lease guarantee is called in, your personal assets are in scope — savings, and in serious cases your home.
A limited company is a separate legal person. Its debts are its own, and your exposure is generally capped at what you have put into it. There are real exceptions: fraud and wrongful trading pierce that protection, and in practice a bank lending to a young company will usually require a personal guarantee from the directors, which voluntarily removes the protection for that specific debt.
So the practical question is not “do I want protection” — everyone does — but how much risk the business actually carries. A freelance copywriter working from a laptop has very little exposure. A builder working on other people’s property, a caterer handling food, or anyone signing a ten-year commercial lease has a great deal.
Tax: the advice most articles give is now out of date
The conventional wisdom is that a limited company saves you tax once profits pass somewhere around £30,000 to £50,000. That was broadly true for years. It is much weaker advice in 2026/27 than it used to be, and if you are relying on an article written before April 2026 you are working from figures that have moved against you.
First, the mechanism, which has not changed.
As a sole trader, you pay income tax and Class 4 National Insurance on every pound of profit, at your personal rates, whether or not you take the money out. Profit is income; there is no distinction.
As a limited company, the company pays corporation tax first. What is left belongs to the company, not to you. You then extract it — usually a small salary plus dividends — and pay personal tax on what you extract.
The rates that apply in 2026/27
| Rate | |
|---|---|
| Personal allowance | £12,570 (tapers away from £100,000) |
| Income tax | 20% to £50,270, 40% to £125,140, 45% above |
| Class 4 NI (self-employed) | 6% from £12,570 to £50,270, 2% above |
| Corporation tax | 19% to £50,000, 25% above £250,000 |
| — marginal band | £50,000–£250,000 taxed at an effective 26.5% |
| Dividend allowance | £500 |
| Dividend tax | 10.75% basic, 35.75% higher, 39.35% additional |
| Employer NI | 15% above a £5,000 secondary threshold |
The line that matters is the dividend one. The basic and higher dividend rates each rose by two percentage points on 6 April 2026, from 8.75% and 33.75%. Combined with a dividend allowance that has been cut from £5,000 to £500 over the past few years, and employer National Insurance at 15% on a threshold of just £5,000, most of the arithmetic that used to favour incorporation has been eroded.
What that looks like on £60,000 of profit
Take someone with £60,000 of profit who needs to draw all of it, in England, Wales or Northern Ireland.
| Sole trader | Limited company | |
|---|---|---|
| Income tax | £11,432 | £0 on a £12,570 salary |
| National Insurance | £2,457 (Class 4) | £1,136 (employer NI) |
| Corporation tax | — | £8,796 |
| Dividend tax | — | £3,977 |
| Take-home | £46,111 | £46,091 |
Twenty pounds apart — and that is before the extra £800 to £2,000 a year a limited company costs in accountancy. On these figures, at this profit level, drawing everything, incorporating for tax reasons alone leaves you worse off.
So when does a company still win?
It still does, frequently. But the advantage now comes from things other than simple extraction, and it is worth being clear about which:
You do not need to draw it all. This is the big one. Profit left in the company is taxed at 19% and nothing more. If you can live on part of the profit and retain the rest — to reinvest, to build a reserve, or to draw in a later year when your personal rate is lower — the company is comfortably ahead.
Pension contributions. Employer contributions from the company are deductible against corporation tax and avoid National Insurance entirely. For anyone seriously funding a pension this can outweigh everything else on this page.
Splitting income with a spouse or partner. If they genuinely participate in the business and hold shares, dividends can use a second personal allowance and basic rate band. This is legitimate but has conditions, and it is worth advice rather than assumption.
Higher profits. Above roughly £100,000 the picture shifts again, particularly around the personal allowance taper, where a sole trader faces an effective 60% marginal rate on income between £100,000 and £125,140 and a company director can manage drawings to avoid it.
You are in Scotland. Scottish income tax has more bands and higher rates in the middle, so Scottish sole traders pay more than the figures above. That pushes the crossover point down and makes incorporation more attractive, not less.
What to take from this
Do not incorporate for tax reasons on the strength of an article — including this one. The figures above are illustrative, ignore pension contributions and retained profit, and assume you draw everything.
What has genuinely changed is the burden of proof. Incorporating used to be the obvious answer above about £40,000; now it needs an actual reason — retained profit, pensions, income splitting, liability protection, or a client who will not contract with a sole trader. If none of those apply and you simply want to take home more of a modest profit, the sole trader route is likely to be as good or better, and considerably cheaper to run.
Check the current rates on GOV.UK, and if you are anywhere near the boundary, an hour with an accountant will pay for itself many times over.
Paperwork: what you are signing up for
Sole trader. Register for Self Assessment with HMRC, which takes about ten minutes online. Keep records of income and expenses. File one tax return a year. That is genuinely most of it. Many sole traders manage on a spreadsheet, though Making Tax Digital is progressively changing what is required — we have written separately about what that means for the self-employed.
Limited company. Incorporate at Companies House. File annual accounts and a confirmation statement, both publicly visible. Run payroll if you take a salary. File a corporation tax return. Keep company money genuinely separate from personal money, and document anything you take out. Most directors use an accountant, and the fee is a real annual cost rather than an optional extra.
The publicity point catches people out. A limited company’s accounts and the names of its directors are on the public record and anyone can look them up, including competitors and prospective clients. Some people find that uncomfortable. Sole trader figures stay private.
Credibility: real, but often overstated
Some clients — particularly large corporates and public sector buyers — prefer or require suppliers to be limited companies. Procurement systems are frequently built around company numbers, and some frameworks will not onboard a sole trader at all.
That is a genuine commercial reason to incorporate, and it has nothing to do with tax. If the customers you want are in that category, the decision is largely made for you.
Outside that, the effect is smaller than people assume. A sole trader with good work and good references is not losing contracts to the letters after a business name.
Partnerships and LLPs, briefly
Two other structures come up, both when more than one person is involved.
A partnership is the sole trader arrangement with two or more people. Profits and losses are split according to your agreement, and each partner pays tax on their share. Liability is unlimited, and — this matters — you can be liable for debts your partner ran up without you. Never enter one without a written partnership agreement. It is the cheapest insurance in business, and the absence of one is behind a remarkable share of ruined friendships.
A limited liability partnership (LLP) adds limited liability to that structure. It is more expensive to run, files accounts publicly, and is most common in professional services — solicitors, accountants, surveyors. If you are choosing between an LLP and a limited company, that is a conversation with an accountant rather than an article.
If you are running more than one venture, the related question of whether they need separate structures is worth reading up on — we have covered running two businesses under one name separately.
A practical rule for deciding
Strip away the detail and it comes down to this.
Start as a sole trader if you are testing an idea, the business carries little liability risk, profits are modest, and you want to be trading this week rather than next month. You can incorporate later, and transferring a going concern into a company is a well-worn path your accountant will have done many times.
Incorporate from the start if any one of these is true: the business carries real liability exposure, you are seeking outside investment, your target customers will not buy from a sole trader, you intend to retain profit in the business rather than draw it all, or you are funding a pension seriously. Note what is missing from that list — “my profits are quite high” is no longer sufficient on its own.
Get advice if you are close to any of those, or you are in Scotland, where the income tax bands change the arithmetic. That is not a fudge: the decision genuinely turns on details an article cannot know about you, and the cost of an hour’s advice is trivial against getting it wrong for three years.
What you should not do is spend six weeks deciding. The most common expensive mistake here is not choosing the wrong structure; it is delaying the business while choosing.
Where this fits into your business plan
Your structure is not a footnote to a business plan — it changes the numbers in it. Corporation tax and income tax are calculated differently, National Insurance works differently, how you pay yourself is different, and a lender or investor will read the plan differently depending on which one you are.
If you are writing a plan for funding, sort the structure first. SquarePlan’s software handles all the UK structures and calculates the tax position for whichever you choose, so you can model a sole trader and a limited company version and compare them directly — which is often the clearest way to settle the question for your own numbers. If you would rather not build it yourself, our business plan writing service puts a chartered accountant on it, and the structure question is one of the first things they will work through with you.
For plans going to a bank in particular, the structure decision interacts with what you can borrow and what security you will be asked for — worth reading our guide to what lenders look for in a business plan before you commit either way.