Sole trader is simpler
- You and the business are the same legal entity.
- One Self Assessment return per year.
- No separate accounts to file at Companies House.
- Profit taxed at your personal income tax rates plus Class 2 and Class 4 NI.
- Losses can be set against your other income in the same year.
Limited company gives separation and (eventually) efficiency
- A separate legal entity. Your personal assets are generally protected from business liabilities.
- Pays Corporation Tax on profits, currently 19% up to £50,000 of profit, tapering to 25% at £250,000.
- You extract money as a mix of salary and dividends, which at higher income levels is taxed at lower combined rates than straight self-employment.
- Must file annual accounts at Companies House, a Corporation Tax return (CT600) at HMRC, and your personal Self Assessment covering dividends and salary.
Where each one actually works
Under about £30,000 profit
Sole trader is usually both simpler and no more expensive. The limited company's lower tax rates do not yet offset the extra accounting cost and administrative load.
Between £30,000 and £50,000 profit
Depends on your situation. If you need the limited liability (property work, consulting with large clients, anything with real downside risk) or if you want to leave profit in the business to reinvest rather than draw it out, a company starts to make sense. If you need every penny personally, sole trader is still the practical pick.
Above £50,000 profit
Especially if you can leave some profit in the company and draw dividends efficiently, a limited company usually wins on total tax paid. The admin cost becomes a small percentage of the saving.
Non-tax reasons to incorporate
- Clients requiring you to invoice through a limited company.
- Protecting personal assets against real business liabilities.
- Making the business easier to sell or bring investors into later.
Non-tax reasons not to
- You want to use all the money personally and quickly. Dividend-only extraction has a 1 January tax lag that catches new company owners out.
- Your work is low-margin, where the extra admin cost would eat the saving.
The right call is specific to your numbers. A thirty-minute consultation gets to the answer faster than any blog post.