Limited Company vs Sole Trader: Which Is Right for You?

When I set up Kaizen, I registered as a limited company from day one. Not because I fully understood the implications at that point, but because someone I trusted told me it was the right move for the business I was building. Looking back, it was one of the best early decisions I made. The tax savings alone over a decade of trading ran into six figures.

But that doesn’t mean a limited company is right for everyone. If you’re earning under £30,000 a year from self-employment, the admin and accounting costs might wipe out any tax advantage. The right structure depends on what you earn, what you plan to earn, and how much hassle you’re willing to tolerate.

Let me break this down properly.

The real difference

The distinction between sole trader and limited company isn’t just about tax. It’s about three things: liability, tax treatment, and admin burden.

As a sole trader, you and the business are legally the same entity. If the business owes money, you owe money. Your personal assets (house, car, savings) are on the line if things go wrong. You pay income tax and National Insurance on your profits.

As a limited company, the business is a separate legal entity. Your liability is limited to what you’ve invested in the company (usually £1 in share capital). If the business fails, your personal assets are generally protected. You pay yourself through a combination of salary and dividends, and the company pays corporation tax on its profits.

This liability protection is the bit most people underestimate. When everything is going well, it doesn’t feel important. When a client refuses to pay a £40,000 invoice or someone threatens legal action, you’ll be glad there’s a legal wall between you and the business.

When sole trader makes sense

Sole trader is the right choice if:

• Your profits are under £30,000 to £40,000 a year. At this level, the tax difference is small or non-existent, and the savings on accounting fees tip the balance.
• You want minimal admin. Registering is free and takes minutes. Your tax return is a single self-assessment form. No Companies House filings, no confirmation statements, no separate business bank account required (though I’d recommend one anyway).
• You’re testing a side hustle or new idea. If you’re not sure the business will work, starting as a sole trader keeps things simple. You can always incorporate later.
• You’re a freelancer with low risk. If you’re a graphic designer or copywriter with no employees and no significant contracts, the liability protection of a limited company may not be worth the extra admin.

The key advantage: simplicity. You register for self-assessment with HMRC, keep your records, and file one tax return a year. That’s it.

When a limited company makes sense

A limited company becomes worth it when:

• Your profits exceed £40,000 a year. This is roughly the crossover point where the tax savings outweigh the additional accounting costs.
• You want to protect personal assets. If you’re taking on contracts, hiring staff, or operating in a sector where things can go wrong, limited liability matters.
• You want to build something you can sell. A limited company is a separate entity with its own value. You can sell it, bring in shareholders, or transfer ownership. You can’t sell a sole tradership.
• You want to retain profits in the business. Corporation tax at 25% is lower than the higher rate income tax at 40%. If you don’t need all the profit personally, leaving it in the company and paying corporation tax is cheaper than drawing it out and paying income tax.
• Credibility matters. Some larger clients prefer (or require) working with limited companies. Having “Ltd” after your name can open doors that sole trader status doesn’t.

The tax maths

This is where the decision usually gets made. Let’s compare the total tax bill at three profit levels.

At £50,000 profit

Sole trader:

• Income tax: £7,486
• Class 2 NI: £179
• Class 4 NI: £2,996
• Total: £10,661
• Take-home: £39,339

Limited company (salary £12,570 + dividends):

• Corporation tax: ~£8,918
• Dividend tax: ~£2,427
• Employer NI: ~£479
• Total: ~£11,824
• Take-home: ~£38,176 (but with pension flexibility)

At £50,000, the difference is marginal. The sole trader actually takes home slightly more once you factor in accounting costs of £1,000 to £2,000 for the limited company. This is why I say the crossover point is around £40,000 to £50,000.

At £80,000 profit

Sole trader:

• Income tax: £19,486
• Class 2 NI: £179
• Class 4 NI: £3,596
• Total: £23,261
• Take-home: £56,739

Limited company (salary £12,570 + dividends):

• Total tax and NI: ~£24,695
• Take-home: ~£55,305

Wait, the limited company pays more? Not quite. The limited company director can make employer pension contributions, which reduce corporation tax. A £10,000 pension contribution saves £2,500 in corporation tax and builds retirement wealth tax-free. Factor that in and the limited company wins clearly.

At £100,000 profit

Sole trader:

• Income tax: £27,486
• Class 2 NI: £179
• Class 4 NI: £3,996
• Plus: loss of personal allowance above £100,000 (effective 60% rate)
• Total: ~£35,661+
• Take-home: ~£64,339

Limited company (salary £12,570 + dividends + pension):

• Employer pension contribution: £20,000
• Corporation tax on remaining: ~£15,485
• Dividend tax: ~£5,970
• Total: ~£21,934 (plus £20,000 in your pension)
• Take-home: ~£58,066 cash + £20,000 pension

At higher profit levels, the limited company route pulls away significantly. The ability to make pension contributions and avoid the personal allowance trap (where you lose £1 of allowance for every £2 earned over £100,000) is a massive advantage.

Companies House requirements

Running a limited company means dealing with Companies House. Here’s what that involves:

• Annual confirmation statement: Filed once a year, costs £34. Confirms your company details are up to date.
• Annual accounts: Must be filed within 9 months of your financial year end. For small companies, these can be abbreviated.
• Corporation tax return: Filed with HMRC within 12 months of your financial year end.
• Public record: Your company’s accounts, registered office, and director details are publicly available. This bothers some people more than others.

Miss a filing deadline and Companies House will fine you. Repeatedly miss them and they can strike off your company. Your accountant should handle all of this, but you need to give them the information on time.

Accounting costs

As a sole trader, you can realistically do your own accounts using software like FreeAgent or Xero. Many people manage their own self-assessment without an accountant, though I’d recommend at least having one review your return.

For a limited company, you’ll almost certainly need an accountant. Expect to pay:

• £1,000 to £1,500 a year for a straightforward limited company with one director, no employees, and simple transactions
• £1,500 to £2,500 a year if you have employees, VAT registration, or more complex affairs

This cost needs to be factored into your decision. If the tax savings of a limited company are £2,000 a year but the accountant costs £1,500, you’re only £500 better off. At that point, the extra admin might not be worth it.

A quick word on IR35

If you’re a contractor working through a limited company, IR35 is the elephant in the room. These rules determine whether your contract is genuinely a business-to-business arrangement or effectively employment in disguise. If HMRC decides your contract falls “inside IR35”, you’ll pay the same tax as an employee, wiping out most of the limited company advantages.

Since April 2021, the responsibility for determining IR35 status shifted to the end client (for medium and large businesses). This means the client decides whether you’re inside or outside IR35, not you.

If the majority of your income comes from a single client, and you work at their premises on their schedule using their equipment, IR35 is something you need to take seriously. Get specialist advice.

The hassle factor

I’m not going to pretend a limited company is the same amount of work as being a sole trader. It isn’t. You’ll need to:

• Maintain a business bank account (separate from personal)
• Keep board minutes and dividend vouchers
• File multiple returns each year
• Pay your accountant
• Manage PAYE if you’re paying yourself a salary

For a sole trader, the admin is genuinely minimal. Register, keep records, file one tax return. Done.

The question is whether the tax savings, liability protection, and professional advantages of a limited company justify the extra overhead. For me, they absolutely did. For someone earning £25,000 a year from a side project, they probably don’t.

My recommendation

If you’re earning under £30,000 profit from self-employment, start as a sole trader. Keep it simple. Focus on growing the business.

If you’re consistently earning over £40,000 to £50,000, talk to an accountant about incorporating. The tax savings start to become material and the liability protection gives you peace of mind.

If you’re earning over £80,000, you should already be a limited company. The numbers are too significant to ignore.

And wherever you are on that spectrum, get an accountant who actually advises you, not just one who files your return and sends an invoice. The right accountant pays for themselves many times over. Mine certainly did.

---

Keep reading

• Salary vs Dividends: The Optimal Split for Company Directors
• Business Expenses: What You Can and Cannot Claim
• How to Start a Business