Sole trader or limited company?
A sole trader pays income tax and Class 4 National Insurance on profit. A company pays corporation tax at 19% to 25%, and you are then taxed personally on what you take out — dividends at 10.75% to 39.35%. A company can be more efficient at higher profits, especially where money stays in the business, but brings statutory accounts, a CT600 and a confirmation statement.
The question everyone asks and almost nobody should answer from a rule of thumb. The tax difference is real, it is smaller than it was, and it is not always the deciding factor.
How each is taxed
As a sole trader you and the business are the same person. Profit is taxed as your income — income tax plus Class 4 National Insurance — whether or not you took it out of the business account.
As a company there are two layers. The company pays corporation tax on its profit. Then you pay personal tax on whatever you take out: salary at income tax rates with National Insurance, or dividends at10.75% to 39.35% with none.
That second structure is where the advantage comes from — and also where it is overstated, because both layers have to be counted. Comparing corporation tax against income tax while forgetting the dividend tax is the most common error in every forum thread on the subject.
What actually moves the answer
- How much you need to draw. A company suits someone who can leave profit in the business. If you need all of it personally, both layers apply to all of it and the gap narrows sharply.
- Profit level. Below the £50,000 small profits threshold the company pays 19%; between there and £250,000 the marginal rate is 26.5%.
- Your other income. A spouse's earnings, rental income or a second job change which band the dividends fall into — see the dividend calculator.
- Pension contributions. An employer contribution from a company is deductible and carries no National Insurance, which is often worth more than the headline comparison.
- The dividend rate rise. Two points on basic and higher rates this year removed part of the advantage that made incorporation obvious a few years ago.
What a company costs beyond tax
| Sole trader | Limited company | |
|---|---|---|
| Annual filing | One Self Assessment | Accounts + CT600 + your own return |
| Also due | — | Confirmation statement, on its own date |
| Paying yourself | Just take it | Payroll and dividend paperwork |
| Public record | Nothing published | Accounts and officers on the register |
| Late filing | £100 and escalating | £150–£1,500 at Companies House, plus HMRC separately |
None of that is difficult. All of it is a cost — in fees, in attention, and in the risk of a penalty for a deadline nobody was tracking. For a business earning modestly it can consume the saving entirely.
Get your break-even, not a rule of thumb
Send us your profit, what you need to draw and what else you have coming in. We will model both structures on your actual numbers, including the admin cost, and tell you where the line falls for you — and if it says stay a sole trader, that is what we will say.
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Free assessment first. If there is work to do, you get a fixed quote in writing before anything starts.
The order that risks least
Start as a sole trader if you are starting out or unsure. Registration is free and quick, the admin is minimal, and you can incorporate the moment the numbers justify it.
Going the other way is worse. A company that turned out to be unnecessary still has to beclosed properly — which takes months, has its own rules, and costs more than the year of tax it was supposed to save.
Questions people ask
At what profit does a company become worth it?
There is no universal figure, and any guide quoting one is assuming things about you — that this is your only income, that you draw everything, that you value the admin at zero. What decides it is your profit, how much you actually need to take out, and whether you will leave money in the business.
What does a company actually cost to run?
Statutory accounts, a CT600, a confirmation statement, usually a payroll scheme, and a separate bank account. Miss the filings and the penalties are automatic: £150 rising to £1,500 at Companies House, separately from HMRC's.
Is limited liability the real reason?
For some trades, yes — and it is a better reason than tax, because it does not move with the Budget. But it is not absolute: directors give personal guarantees for finance, and liability for their own negligence is not removed by incorporation.
Can I switch later?
Yes, and starting as a sole trader is usually the lower-risk order. Incorporating later is straightforward; closing a company you did not need costs more than never forming it — see closing a limited company.
Does a company look more credible to clients?
Sometimes, in some sectors, and it is a real consideration for contracts with larger businesses. It is also the reason people incorporate when the numbers say otherwise, so it is worth being honest with yourself about whether it is a requirement or a preference.
What about IR35?
If you work through your own company for end clients, the off-payroll rules may apply and can remove much of the advantage. Anyone contracting through a personal company should establish their status before deciding on structure, not after.
Figures are for the tax year shown and change every April. They are general information, not advice — we check the current position for your circumstances before anything is filed.
Reviewed 19 October 2026.
Part of our work on company and director tax — if you want someone to take it off your hands, start with our how to pay yourself from a limited company page.