Guide

Sole trader or limited company? How to decide (UK)

Updated 25 July 2026

Choose sole trader for the simplest, cheapest start when profits are modest. Choose a limited company for liability protection and, usually above roughly £30,000 profit, lower tax. Most people begin as a sole trader and switch to a company later.

Sole trader or limited company is the first real decision most UK businesses face, and it is easy to overthink. The mechanics are settled - HMRC and Companies House own those. What they cannot tell you is which one fits your situation. That is the actual decision, and it comes down to four things: liability, tax, admin and privacy.

Here is the short version. Choose a sole trader if you want the simplest, cheapest way to start and your profits are modest. Choose a limited company when you want to protect your personal assets, look more established, or your profits are high enough (roughly £30,000 a year and up) that salary plus dividends beats Income Tax. Most people start as a sole trader and switch to a company later - and you can.

One thing to be clear about up front: this is general information, not accounting, tax or legal advice. The right structure depends on your specific numbers and plans, and a qualified accountant should confirm the call before you commit. Corey can talk you through the trade-offs against your figures and run the recurring admin once you have decided, but it does not give regulated advice and does not replace your accountant.

Sole trader vs limited company at a glance

Factor	Sole trader	Limited company
Liability	Unlimited - you and the business are the same in law, so your personal assets are exposed	Limited - the company is a separate legal entity, so personal assets are protected (barring fraud or personal guarantees)
Tax	Income Tax (20/40/45%) plus Class 4 National Insurance on profits	Corporation Tax on profits (19% up to £50,000, up to 25% above £250,000), then you take a salary and dividends
Admin	One Self Assessment return a year	Annual accounts, a Company Tax Return, an annual confirmation statement, and director duties
Privacy	Your details stay private	Directors and the registered office appear on the public Companies House register
Cost to start	Free to register with HMRC	£100 to incorporate online with Companies House
Best for	Getting started, testing an idea, modest or variable profits	Protecting assets, higher profits, credibility, raising investment

What is the actual difference?

A sole trader and their business are the same thing in the eyes of the law. You keep the profits, and you are personally responsible for the debts. It is you, trading.

A limited company is a separate legal person that you own and run. The company earns the money, owes the debts and pays its own tax. You take money out as a director through salary and dividends. That separation is the root of almost every other difference below - liability, tax and admin all flow from it.

Which is cheaper to run?

To set up and keep going, the sole trader route is usually cheaper. Registering with HMRC costs nothing, and you file a single Self Assessment return each year.

A limited company costs £100 to incorporate online at Companies House (or £124 by post), and it carries more ongoing cost: annual accounts, a Company Tax Return, and an annual confirmation statement that costs £50. Most company owners also pay an accountant, because the filings are more involved. So if you are optimising purely for low admin and low running cost, the sole trader wins - until tax tips the balance.

Which pays less tax?

This is where it flips, and it depends entirely on your profit.

A sole trader pays Income Tax on profits at 20%, 40% or 45%, plus Class 4 National Insurance - 6% on profits between £12,570 and £50,270, and 2% above that. Class 2 National Insurance no longer has to be paid once profits reach £7,105; it is simply treated as paid to protect your National Insurance record.

A limited company pays Corporation Tax on its profits first - 19% on profits up to £50,000, rising towards 25% on profits over £250,000, with marginal relief in between. You then take money out as a small salary plus dividends, and dividends are taxed at lower rates than salary (8.75%, 33.75% and 39.35%), with a £500 tax-free dividend allowance.

The upshot: below roughly £30,000 of profit there is usually little or no tax advantage to a company, and the extra admin is not worth it. Above that, the salary-plus-dividends mix starts to save meaningful tax, and the gap widens as profits grow. These are guides, not promises - the crossover moves with how much you take out and how you pay yourself, which is exactly the sort of thing to model with an accountant.

What about personal liability?

This is the argument that often decides it. As a sole trader, there is no legal line between you and the business, so if it owes money you owe money - your personal savings, and in the worst case your home, are exposed.

A limited company puts a wall between the two. If the company runs into trouble, your liability is generally limited to what you put in, and your personal assets sit behind that wall. The exceptions are fraud, wrongful trading, or debts you have personally guaranteed - lenders often ask directors of new companies to guarantee borrowing, which quietly removes some of the protection. If your work carries real financial or legal risk, limited liability alone can justify incorporating.

What about privacy?

A sole trader keeps their affairs private. Your name, address and numbers are between you and HMRC.

A limited company is on the public record. Your company name, registered office address and the names of directors appear on the Companies House register, which anyone can search, and a version of your accounts is filed publicly too. You can use a registered office service to keep your home address off the register, but the trade-off is real: incorporating means accepting more transparency about who runs the business.

How do you register either one?

For a sole trader, you register with HMRC for Self Assessment. You must do this once you earn over £1,000 from self-employment in a tax year, though you can start trading before you register. That is essentially the whole setup.

For a limited company, you incorporate at Companies House. Online registration costs £100 and is usually completed within 24 hours; a postal application costs £124 and takes longer. You will also register the company for Corporation Tax, and set up a business bank account, payroll if you pay yourself a salary, and a system for the annual filings.

When should you switch to a limited company?

There is no legal threshold that forces the switch, but the common triggers are clear. People incorporate when profits reach roughly £30,000 to £40,000 a year and the tax saving outweighs the extra admin; when they want limited liability because the work carries risk; when a bigger client or lender prefers to deal with a company; or when they want to raise investment or bring in a co-owner, which a company structure supports and a sole trader does not.

Switching is common and not difficult: you incorporate a new company, move the business into it, tell HMRC and stop filing as a sole trader. Because there are tax points around transferring assets and goodwill, this is a moment to use an accountant rather than wing it.

Get an accountant to confirm your numbers

None of the above is advice about your specific situation, and it is not meant to be. The tax-efficient choice depends on your profit, how you want to pay yourself, your other income and your plans - and those move the answer. A qualified accountant will model your actual numbers and confirm the right structure, usually for a fee that is small next to the tax and liability at stake. Treat this guide as the map, and your accountant as the person who checks the route against your circumstances.

Where Corey fits

Corey is not your accountant and does not pretend to be. What it does is remove the two hard parts of this decision: seeing your real numbers clearly, and then living with the admin once you have chosen.

Before you decide, Corey can pull your income and costs together and lay out the trade-offs against your figures, so the conversation with your accountant starts from a clear picture rather than a guess. After you decide, it runs the recurring work either way - bookkeeping, tracking deadlines, keeping records ready for Self Assessment or your company filings, and preparing what your accountant needs. It does the legwork and hands you the decisions; it never gives regulated advice or replaces the professional who signs it off.

That is the point of running a business with Corey. You make the call that needs a human, your accountant confirms it, and the paperwork that used to eat your evenings just runs.

Ready to try it? Start with Corey - the first 28 days are on us, no card.

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Questions, answered

If you are starting out, earning modest profits and want the least admin, a sole trader is usually the simpler, cheaper choice - you can start trading straight away. A limited company makes more sense when you want to protect your personal assets behind limited liability, look more established to clients or lenders, or your profits are high enough (roughly £30,000 a year and up) that taking a salary plus dividends saves tax. It depends on your numbers and plans, so confirm the call with a qualified accountant.

To set up and run, usually yes. A sole trader pays nothing to register with HMRC and files one Self Assessment return a year. A limited company costs £100 to incorporate online with Companies House, then carries more ongoing admin - annual accounts, a Company Tax Return, a confirmation statement (£50 a year) and usually an accountant. On tax, though, a company can be cheaper once profits are high enough that dividends beat Income Tax, so "cheaper" depends on whether you mean admin or tax.

There is no fixed threshold, but people commonly switch when profits reach roughly £30,000 to £40,000 a year and the tax saving from salary-plus-dividends outweighs the extra admin, or sooner if they need limited liability, want to look more established, plan to take on investment, or win clients who prefer to work with a company. Ask an accountant to model your numbers - the crossover point moves with your profit and how you pay yourself.

To become a sole trader you register with HMRC for Self Assessment - you must do this once you earn over £1,000 from self-employment in a tax year, and you can start trading before you register. To form a limited company you incorporate at Companies House, which costs £100 online and is usually done within 24 hours, then you register the company for Corporation Tax. A company also has to keep statutory records and file annually.

Yes. Changing from a sole trader to a limited company is common and straightforward - you incorporate a new company at Companies House, move your business into it, tell HMRC, and stop filing as a sole trader. Going the other way, from company back to sole trader, is also possible but means closing the company down properly. An accountant should handle the transfer of assets and any tax points so nothing is missed.