If you're starting or growing a business in the UK, this is usually the first real decision you'll make — and it affects your tax bill, your paperwork, and your personal liability for years to come.
The core difference
As a sole trader, you and your business are legally the same entity. There's no separation — profits are your income, and if the business owes money, so do you personally.
A limited company is a separate legal entity. It owns its own profits, enters its own contracts, and — critically — its debts generally stay with the company, not you personally, as long as things are run properly.
How tax differs
Sole traders pay Income Tax and Class 2/4 National Insurance on all business profits, via Self Assessment. There's no separation between "salary" and "profit" — it's all taxed as your personal income.
Limited companies pay Corporation Tax (currently 19–25% depending on profit level) on company profits. As a director, you then decide how to pay yourself — typically a mix of a small salary plus dividends, which are taxed differently (and often more efficiently) than salary once profits reach a certain level.
| Sole Trader | Limited Company | |
|---|---|---|
| Legal status | Same as you | Separate entity |
| Liability | Personal | Limited (usually) |
| Tax | Income Tax + NI | Corporation Tax + dividend tax |
| Admin | Self Assessment only | Company accounts + CT600 + payroll |
| Public record | Private | Filed at Companies House |
When a sole trader setup makes sense
- You're testing an idea or just starting out
- Profits are modest — often under roughly £30,000–£40,000
- You want minimal admin and full control
- You don't need the credibility or liability protection a limited company offers
When incorporating starts to make sense
- Profits are consistently high enough that dividend tax treatment saves you money overall
- You want to protect personal assets from business risk
- You're working with clients or investors who expect a limited company
- You want to retain profits in the business for future investment rather than drawing everything out
What we'd actually do
Run the numbers both ways for your specific situation, factoring in your other income, how much you need to draw personally versus leave in the business, and your appetite for the extra admin a limited company brings. It's a five-minute conversation that can save — or cost — thousands over a few years.
Let's handle this for you.
Free initial consultation — we'll review your situation and tell you exactly what needs doing, and by when.
Book your free review