Sole trader vs limited company

Sole trader or limited company? It’s the first big decision for any UK freelancer or small business owner. Both are legitimate — the right answer depends on your profit, how you take money out, and how much admin you’re prepared to handle.

The two structures in one minute

• Sole trader — you and the business are the same. You pay income tax (20%/40%/45%) and Class 4 NI (6%/2%) on your profit through Self Assessment. No registration fee, no company accounts, full privacy.
• Limited company — the company is a separate legal entity. It pays corporation tax (19%–25%) on its profits. You take money out as a salary (attracts income tax and NI) and dividends (taxed at 8.75%/33.75%/39.35% above a £500 allowance). You must file accounts and confirmation statements with Companies House.

The tax picture

For low profits, the sole trader route is usually simplest and often cheapest. As profits rise, the company structure starts to win because:

• Company profits are taxed at up to 25%, below the 40%/45% personal rates that apply to a sole trader’s profits
• Dividends aren’t subject to National Insurance
• Profits left inside the company are deferred from personal tax until you take them out

Rough example. £60,000 of profit. A sole trader pays roughly £13,000–£15,000 in income tax plus NI. A company pays ~£14,000 corporation tax, but a salary+dividend combination can be structured to reduce total personal tax on extraction, and unused profit can stay in the company for future years. The exact figure depends on how much you withdraw — model it with the calculators.

The non-tax differences

Tax isn’t everything:

• Liability — a company protects your personal assets if the business fails; a sole trader doesn’t
• Credibility — some clients and lenders prefer trading with a company
• Admin — companies have Companies House filings, payroll (even for one director), and typically an accountant
• Public records — director details and accounts are public for companies
• Complexity — salary vs dividend planning, and getting money out correctly, takes more thought

How to choose

A sensible starting rule of thumb:

• Profit under ~£30,000 — sole trader is usually simpler and cheaper
• Profit £30k–£60k — model both; companies start to look attractive
• Profit above £60k or growing fast — a limited company is often worth the admin
• Limited liability matters to you (e.g. you face real client risk) — the company structure wins on protection alone

Always check your own numbers — the calculators here are a great place to start, and a quick chat with an accountant is worth the fee at this decision point.

Model it

Compare the routes with the self-employed tax calculator, the corporation tax calculator and the dividend tax calculator.