Almost every business owner asks this question, usually twice: once at the start and again when profits grow. The honest answer is that it depends on the numbers and on things that are not numbers, and that the right answer changes as the business changes. This guide sets out the differences that matter, with the 2026/27 rates, so that the decision can be made deliberately rather than by default.
What each one is
A sole trader is an individual running a business. There is no separate legal person; the business's income is your income, its debts are your debts, and it is taxed through Self Assessment along with everything else you earn. Setting up involves registering with HMRC and nothing else. A partnership is two or more sole traders in the same business, with a partnership return and each partner taxed on their share.
A limited company is a separate legal person registered at Companies House. It owns the business, enters the contracts, owes the debts and pays Corporation Tax on its profits. You are its director, running it, and its shareholder, owning it, and you take money out as salary, dividends or both, each taxed in its own way. The company has its own filing obligations: accounts, a Corporation Tax return and a confirmation statement every year, with a public record of its directors, shareholders and accounts.
Tax: how the arithmetic differs
As a sole trader, profit is taxed as income at 20%, 40% and 45% after the £12,570 personal allowance, with Class 4 National Insurance at 6% on profit between £12,570 and £50,270 and 2% above. Scottish residents pay the Scottish bands. Everything is taxed in the year it is earned whether or not you draw it.
Through a company, profit is first taxed at Corporation Tax: 19% up to £50,000, 25% above £250,000, and an effective 26.5% marginal rate in between. What you take out is then taxed again on you. A salary is deductible for the company but attracts employer National Insurance at 15% above £5,000 and employee National Insurance at 8% above £12,570, plus income tax. Dividends are not deductible but carry no National Insurance and are taxed at 10.75%, 35.75% and 39.35% above the £500 allowance, the rates having risen by two percentage points in April 2026. The usual structure is a salary around the personal allowance and dividends for the rest.
The result is that at modest profits, roughly up to £30,000 to £40,000, the company saves little or nothing once the cost of running it is counted, and at higher profits it saves more, especially where profit can be left in the company rather than extracted, or paid into a pension as an employer contribution free of all personal tax and National Insurance. The take-home pay calculator runs the comparison for your figure.
Liability
A sole trader is personally liable for every debt of the business without limit. If a customer sues, a supplier is not paid, or a lease goes wrong, your house and savings are exposed. A company's liability is the company's; shareholders lose at most what they put in. The protection is real but not total: directors give personal guarantees to landlords and lenders routinely, can be personally liable for wrongful trading if they keep an insolvent company going, and are liable for their own negligence. For businesses with employees, premises, significant contracts or physical risk, the company's protection is a strong reason on its own.
Admin and cost
A sole trader files one Self Assessment return a year and keeps records. A company files statutory accounts with Companies House and a CT600 with HMRC each year, runs payroll for the director with monthly submissions, files a confirmation statement with a £50 fee, keeps statutory registers, documents every dividend with a minute and voucher, and the director still files a personal return. The professional cost of this is typically £400 to £900 a year more than a sole trader pays. Making Tax Digital for Income Tax applies to sole traders and landlords above the income threshold but not to companies, which is a point in the company's favour for some.
Perception and practicalities
Some clients, particularly larger businesses and agencies, prefer or insist on contracting with a company. Some lenders and landlords prefer a company with a track record. A company name is protected on the register, whereas a sole trader's trading name is not. Against that, a company's accounts and the directors' names are public, and a company cannot simply be stopped: it has to be made dormant or closed properly.
Property and investment
Buy-to-let through a company deducts mortgage interest in full and pays Corporation Tax, against the individual landlord's 20% tax credit on interest and the new property income tax rates of 22%, 42% and 47% arriving in April 2027. But company mortgages are dearer, profits extracted are taxed as dividends, and transferring existing properties into a company triggers Capital Gains Tax and Stamp Duty Land Tax. It suits portfolios built from scratch by higher-rate taxpayers more than one or two existing properties.
Changing your mind
Moving from sole trader to company is common and simple: form the company, transfer the business to it, register for the taxes, and tell HMRC the sole trade has ceased. Incorporation relief defers Capital Gains Tax on goodwill and assets transferred for shares. Moving back from a company to a sole trader is possible but messier, involving closing the company properly. The decision is not permanent, but it is easier in one direction than the other.
A way to decide
Start with the numbers: run your expected profit through the calculator and look at the gap after £600 or so of extra compliance cost. Then weigh liability: if the business could produce a claim larger than you can afford, that outweighs a small tax difference. Then consider how you will take money out and whether you need all of it, since retained profit and pension contributions are where companies pull ahead. Then look at what your customers expect. If the answer is still close, start as a sole trader; it is cheaper to incorporate later than to run a company you did not need.
Company formation is £49 plus the £100 Companies House fee. Sole trader accounts are from £149 and limited company accounts from £299. A tax planning review at £249 gives a definitive answer on your own figures.
Three worked examples
A freelance designer with £28,000 profit and no plans to hire keeps around £23,600 as a sole trader after income tax and Class 4. Through a company with a £12,570 salary and the rest as dividends, she keeps a similar figure before paying £600 or more a year to run the company. Sole trader is the sensible answer, with incorporation reviewed if profit passes £40,000.
A plumber with £65,000 profit, a van, an apprentice and public-liability exposure keeps around £47,000 as a sole trader. Through a company he keeps roughly £1,500 to £2,500 more after the company's running costs, and the company contains the liability of a trade that can cause real damage. The company wins on both counts.
A consultant with £120,000 profit who needs only £60,000 to live on keeps around £75,000 as a sole trader, paying the taper on her personal allowance. Through a company she extracts £60,000 efficiently, leaves the remainder in the company at 25% Corporation Tax or pays it into a pension with no personal tax at all, and avoids the taper entirely. The company wins decisively, and the saving grows every year the surplus is retained.
What changes the answer over time
The dividend rates rose in April 2026 and property and savings rates rise in April 2027; Corporation Tax thresholds have been frozen since 2023; the Employment Allowance and the National Insurance thresholds move most Aprils. A structure chosen in one year should be checked against the rules of the next, and the calculator on this site is updated when they change.
Three worked examples
A freelance designer with £28,000 profit and no plans to hire keeps around £23,600 as a sole trader after income tax and Class 4. Through a company with a £12,570 salary and the rest as dividends, she keeps a similar figure before paying £600 or more a year to run the company. Sole trader is the sensible answer, with incorporation reviewed if profit passes £40,000.
A plumber with £65,000 profit, a van, an apprentice and public-liability exposure keeps around £47,000 as a sole trader. Through a company he keeps roughly £1,500 to £2,500 more after the company's running costs, and the company contains the liability of a trade that can cause real damage. The company wins on both counts.
A consultant with £120,000 profit who needs only £60,000 to live on keeps around £75,000 as a sole trader, paying the taper on her personal allowance. Through a company she extracts £60,000 efficiently, leaves the remainder in the company at 25% Corporation Tax or pays it into a pension with no personal tax at all, and avoids the taper entirely. The company wins decisively, and the saving grows every year the surplus is retained.
What changes the answer over time
The dividend rates rose in April 2026 and property and savings rates rise in April 2027; Corporation Tax thresholds have been frozen since 2023; the Employment Allowance and the National Insurance thresholds move most Aprils. A structure chosen in one year should be checked against the rules of the next, and the calculator on this site is updated when they change.
Three worked examples
A freelance designer with £28,000 profit and no plans to hire keeps around £23,600 as a sole trader after income tax and Class 4. Through a company with a £12,570 salary and the rest as dividends, she keeps a similar figure before paying £600 or more a year to run the company. Sole trader is the sensible answer, with incorporation reviewed if profit passes £40,000.
A plumber with £65,000 profit, a van, an apprentice and public-liability exposure keeps around £47,000 as a sole trader. Through a company he keeps roughly £1,500 to £2,500 more after the company's running costs, and the company contains the liability of a trade that can cause real damage. The company wins on both counts.
A consultant with £120,000 profit who needs only £60,000 to live on keeps around £75,000 as a sole trader, paying the taper on her personal allowance. Through a company she extracts £60,000 efficiently, leaves the remainder in the company at 25% Corporation Tax or pays it into a pension with no personal tax at all, and avoids the taper entirely. The company wins decisively, and the saving grows every year the surplus is retained.
What changes the answer over time
The dividend rates rose in April 2026 and property and savings rates rise in April 2027; Corporation Tax thresholds have been frozen since 2023; the Employment Allowance and the National Insurance thresholds move most Aprils. A structure chosen in one year should be checked against the rules of the next, and the calculator on this site is updated when they change.