Sole trader vs limited company — which should you choose

Updated: 14/07/2026 · 7 min read

A sole trader setup is the simplest way to run a UK business: register with HMRC, invoice, file one Self Assessment a year. A limited company is a separate legal entity — more admin and cost, but limited liability and, at higher profits, potentially less tax. Most people rightly start as sole traders and incorporate when the numbers justify it.

Sole trader — pros and cons

✓ Set up in minutes, free
✓ One tax return a year, simple bookkeeping
✓ Privacy — no public filings
✗ Personally liable for business debts
✗ Progressive income tax bites harder at higher profits

Limited company — pros and cons

✓ Limited liability (personal assets generally protected)
✓ Flexible pay: salary + dividends
✓ Credibility — some contracts require a company
✗ Companies House filings, public accounts
✗ Corporation Tax, payroll admin — an accountant becomes near-mandatory (typically several hundred pounds a year extra)

When staying sole trader is right

If profit is up to roughly £30–40k, no client demands a company, and your liability risk is insurable — the sole trader route is usually cheaper once you add up tax AND compliance costs. Simplicity is worth real money: fewer deadlines, fewer things to get wrong.

When a company starts to pay

Stable profit above ~£40–50k with the option to retain earnings in the company
Clients or agencies requiring a limited company
Meaningful liability exposure (construction, installations, advice)
Growth plans: partners, employees, investment

Run the numbers with an accountant

The crossover point depends on dividend taxation, your other income and pension plans. It is one of those decisions where an hour with an accountant pays for itself many times — arrive with a clean year of categorised income and expenses and the modelling takes minutes.

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Frequently asked questions

Can I switch from sole trader to limited company mid-year?+

Yes — incorporate, transfer the trade, and close the sole-trader period on your Self Assessment. An accountant will time it for the best result, often the start of a tax year.

At what profit does a company become worth it?+

There is no single number — commonly quoted is stable profit around £40–50k+, but dividends, other income and compliance costs move the line. Model it on your own figures.

Do clients care that I am a sole trader?+

Consumers and small clients rarely do. Some corporates and agencies insist on a limited company — if yours do, the decision makes itself.

Am I personally liable as a sole trader?+

Yes — there is no legal separation between you and the business. That is what public liability and professional indemnity insurance are for.

This guide is general information, not tax advice. Rules and figures change — check gov.uk (HMRC) for current rates, and speak to an accountant about your situation.