Quick comparison
| Sole trader | Limited company | |
|---|---|---|
| Set-up | Register with HMRC | Companies House incorporation |
| Tax | Income tax + NI on profits | Corporation tax on profits, plus personal tax on extraction |
| Liability | Unlimited personal liability | Limited liability (in most cases) |
| Admin | Lower | Higher (accounts, CT600, confirmation statement) |
| Public records | None | Director and registered office public |
| Credibility | OK for many trades | Often stronger with larger clients |
The tax side, in plain English
As a sole trader, your business profits are your taxable income. You pay income tax and Class 4 NI on the profits each year through Self Assessment.
As a limited company, the company pays corporation tax on its profits. You then decide how to extract money — typically a small salary plus dividends — with each extraction taxed personally on top.
The company route has more moving parts but a wider toolkit for optimising the overall tax bill. Below about £30–40k of profit, the difference is usually modest. Above £50k, the company route often wins. Above £100k, it can win significantly.
Tax savings can disappear if you pick a structure that doesn't fit the rest of your business life. We model both for your numbers and recommend the right answer overall. Get a quote.
Liability: the underrated factor
A sole trader is personally liable for the debts and obligations of the business. If the business fails, your personal assets can be at risk. A limited company is a separate legal person — in most circumstances, only the company's assets are at risk.
For low-risk businesses (e.g. solo consulting, freelance design) the practical risk is small. For businesses with stock, employees, premises or customer-facing risk, the protection matters.
Admin and ongoing obligations
A sole trader files an annual Self Assessment and (from 2026/27 onwards, above the threshold) quarterly MTD updates. That's about it.
A limited company files: annual accounts at Companies House, a corporation tax return (CT600) at HMRC, a confirmation statement annually, plus payroll RTI submissions every pay run if there's payroll, and VAT returns quarterly if VAT-registered. Higher overhead — but most of it is automated by good bookkeeping.
Credibility and customer perception
Some markets and customers prefer to deal with limited companies — especially large corporates, the public sector and B2B procurement. Other markets don't care. If you know your future clients tend to require a limited company on the other side of the contract, that often tips the decision.
Exit and succession
A limited company is easier to sell, bring investors into, or pass on. A sole trade is a person, not an entity — you can sell assets and goodwill but not "the business" as a single sale.
When sole traders should switch to a limited company
Common triggers for the switch:
- Profits consistently over £50,000
- A growing risk profile — liability matters more
- Clients requiring a Ltd on the contract
- Wanting to bring in a co-owner or take investment
- Planning an exit or sale in the next few years
We handle the switch (it's part of free company formation for IGI clients).
Frequently asked questions
There's no single number, but consistently over £40k–£50k of profit is when many sole traders see meaningful net savings from incorporating. Other factors (liability, clients, exit plans) matter too.
Yes. Many people run one trade as a sole trader and a separate business as a limited company. Keep them clearly separate in your records.
Sometimes. Lenders look at your salary plus dividends or your share of net profit, and the rules vary. An accountant's certificate often helps.