# Limited company vs sole trader — which is right for your UK business?

> Compare · Last reviewed 26 May 2026

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## Quick answer

A sole trader is the simplest form of self-employment — you and the business are legally the same. A limited company is a separate legal entity, with its own tax, accounts and Companies House filings, but with limited personal liability.

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Both are common ways to work for yourself in the UK. Sole-trader status is simpler and cheaper to run; a limited company offers liability protection and (in some cases) tax efficiency, but adds compliance work.

## Limited company vs Sole trader

| Criterion | Limited company | Sole trader |
| --- | --- | --- |
| Legal status | Separate legal entity | You and the business are the same person |
| Personal liability | Limited to your share capital (in normal circumstances) | Unlimited — personal assets are at risk |
| Main tax | Corporation Tax on profits (19–25% in 2026/27) | Income Tax + Class 4 NI on profits |
| How you draw income | Salary + dividends + pension contributions | All profit is yours; taxed via Self Assessment |
| Dividend tax allowance | £500 in 2026/27 | N/A |
| Filing | Annual accounts + confirmation statement (Companies House) + CT600 (HMRC) | Self Assessment tax return |
| Public visibility | Accounts, directors and registered address are on public record | Not on public record |
| IR35 | Applies to many off-payroll contractors | Doesn't apply (you're not 'off-payroll') |

## When Limited company suits

- You want personal liability protection
- You want flexibility in how you pay yourself (salary + dividends + pension)
- Your clients prefer or require contracting through a limited company
- You want to retain profits in the company to reinvest or smooth income

## When Sole trader suits

- You're starting out and want minimal admin
- Your profits are modest — sole-trader tax can be simpler and cheaper
- You don't want your business affairs on public record
- You don't need liability protection (low-risk service work, freelance, etc.)

## Frequently asked questions

### When does it make sense to incorporate?

There's no single threshold — it depends on profit level, liability risk, client preferences and whether you'll retain profits. Many advisers look closely once profits are sustainably above the higher-rate threshold.

### What is IR35?

Off-payroll working rules. They determine whether a contractor working via their own limited company should be treated as an employee of the end client for tax — and who's responsible for assessing that.

### Can I be both?

Yes — many people run a limited company alongside separate sole-trader income (e.g. casual work). Each has its own tax treatment.

## Sources

- [GOV.UK — Set up as a sole trader](https://www.gov.uk/set-up-sole-trader)
- [GOV.UK — Set up a private limited company](https://www.gov.uk/set-up-limited-company)
- [HMRC — Corporation Tax rates](https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax)
- [HMRC — IR35 / off-payroll working](https://www.gov.uk/guidance/understanding-off-payroll-working-ir35)

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Independent UK money guidance from [Money Guide](https://moneyguide.org.uk). Information only — not regulated financial advice.