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