Sole trader vs limited company — which is better in 2025/26?
By the PaySlipCheck Editorial team · 15 May 2026 · 8 min read
Sole trader is the default for the UK self-employed: no setup, simple Self Assessment, total flexibility. Limited company requires registration with Companies House, more admin and an accountant — but becomes meaningfully more tax-efficient above roughly £40,000 of annual profit. The switching point used to be lower; the Corporation Tax rise and dividend allowance cuts since 2023 pushed it up. Here's the maths.
The legal difference
A sole trader is a person trading in their own name (or under a trading name they've chosen). Legally, the person and the business are the same entity. If the business owes money, the sole trader owes that money personally — their house, their car, their personal bank account are all on the hook.
A limited company is a separate legal entity that you own (via shares) and probably also run (as a director). The company can owe money, sign contracts and be sued without your personal assets being at risk (provided you haven't given personal guarantees and haven't traded fraudulently).
This liability difference matters more than people realise. If you do any work where mistakes could cost a client meaningful money — software development, construction, legal advice, financial advice — a Ltd company is worth setting up purely for the liability protection, regardless of the tax position.
Tax side by side (2025/26)
Sole trader
- All profit is treated as your personal income.
- Personal allowance £12,570 tax-free.
- Income Tax: 20% / 40% / 45% in the usual bands.
- Class 4 NI: 6% on profit between £12,570 and £50,270, then 2% above (rate cut from 9% to 6% in April 2024).
- Class 2 NI: abolished from April 2024 — you no longer pay a flat weekly contribution. You still get the NI credit for State Pension entitlement provided profits are above £6,725.
- Paid through annual Self Assessment, with payments on account each January and July if your bill is above £1,000.
If you're at the start of this and haven't yet told HMRC you're trading, FreelanceToolkitUK walks through registering as a sole trader with HMRC — when the deadline is, what counts as trading, and what changes the moment you register.
Limited company
- Company profit is taxed at Corporation Tax: 19% on first £50k, marginal relief 26.5% on £50k–£250k, 25% above £250k.
- You pay yourself a small director's salary (typically the £12,570 personal allowance) — no Income Tax, minimal NI.
- Remaining post-tax profit comes out as dividends.
- £500 dividend allowance, then 8.75% / 33.75% / 39.35% in the dividend tax bands.
- Two tax returns: the company's CT600 (filed by your accountant) and your personal Self Assessment.
Take-home comparison
Assuming all profit is taken out as income (no retained earnings), no pension, no allowable expenses beyond the basics:
| Annual profit | Sole trader net | Ltd company net | Ltd advantage |
|---|---|---|---|
| £20,000 | £17,470 | £17,200 | −£270 (sole trader wins) |
| £30,000 | £24,914 | £24,650 | −£264 (sole trader wins) |
| £40,000 | £31,514 | £31,700 | +£186 |
| £50,000 | £38,114 | £38,750 | +£636 |
| £60,000 | £44,094 | £45,500 | +£1,406 |
| £75,000 | £52,914 | £54,950 | +£2,036 |
| £100,000 | £68,114 | £72,500 | +£4,386 |
| £150,000 | £93,800 | £105,200 | +£11,400 |
Important: deduct roughly £1,200–£1,500 a year from the Ltd column for accountancy fees that the sole trader doesn't have. With that adjustment, the switching point lands around £40,000–£45,000 of annual profit for someone taking everything out as income. Below that, sole trader is simpler and often cheaper. Above it, Ltd starts to win meaningfully.
Why Ltd companies become more efficient at higher profits
Two reasons:
- Dividends aren't subject to NI. The 6% NI hit on sole-trader profit between £12,570 and £50,270 is significant — £2,262 a year at the £50,270 threshold. Ltd companies pay 19% Corporation Tax instead, and the dividend rate of 8.75% in the basic band is much gentler than the combined 26% (Income Tax + Class 4 NI) a sole trader pays.
- Income smoothing. A sole trader pays full tax on all profit in the year it arises. A Ltd company can retain earnings (pay 19–25% corp tax and stop there) and pay dividends in later years when personal tax bands are more favourable — for example, a year when you're not working, on maternity leave, or scaling down.
Things sole traders can't do (but Ltd companies can)
- Big pension contributions through the business. A Ltd can make employer pension contributions of up to the £60,000 annual allowance (subject to "wholly and exclusively for trade" test, which contractors usually pass). These contributions reduce Corporation Tax and don't count as your personal income. A sole trader has to use personal pension contributions, which are limited by their relevant earnings.
- Sell the business as shares. If you ever want to sell up, the Ltd company structure makes that a clean transaction. Sole-trader "businesses" are typically sold as asset transfers (often more complex tax).
- Add co-owners cleanly. Want to bring in a business partner? Issue them shares. Sole trader → partnership requires unwinding the sole-trader structure.
- Look more "real" to bigger clients. Some enterprise procurement teams won't engage with sole traders at all.
Things sole traders can do (but Ltd companies struggle with)
- Take money out instantly. Sole trader profit is your money — you can transfer £5,000 from the business account to your personal account on a whim and it's nothing more than bookkeeping. Ltd companies require dividends (need a board minute, even if you're the sole director) or director's loans, both with rules.
- Offset losses against other income. Sole trader losses in your first four years of trading can be carried back against PAYE income from previous jobs — a useful refund mechanism for people leaving employment to go self-employed. Ltd losses can only be offset against company profits.
- Wind down without paperwork. Stop trading as a sole trader = just file your final Self Assessment. Closing a Ltd company involves a strike-off process (DS01 form, 3 months of notice, sometimes a Members' Voluntary Liquidation if there's retained cash).
- Stay below the VAT radar more easily. Both have the same £90,000 turnover threshold but Ltd companies in B2B sectors often register voluntarily; sole traders selling to consumers usually don't.
What it costs to run each
| Cost | Sole trader | Limited company |
|---|---|---|
| Setup | £0 (just register for Self Assessment) | £50 (Companies House) |
| Annual accountant | £250–£600 (optional) | £900–£1,800 (advisable) |
| Confirmation Statement | — | £34/year |
| Bookkeeping software | Free options work (spreadsheet, FreeAgent free tier) | £0–£30/month (often free with banking) |
| Business bank account | Personal account is fine | Required — try Tide, Starling Business or Revolut Business for free |
| Self Assessment | Required | Required (for personal dividends + salary) |
| Corporation Tax return | — | Required (accountant does it) |
| Payroll for director | — | Free with most accountants or via free HMRC Basic PAYE Tools |
Should I switch from sole trader to limited?
Reasonable trigger points:
- Your annual profit is consistently above £40,000–£45,000.
- You're taking on contracts where personal liability is a real risk.
- You want to make substantial pension contributions through the business.
- You want to retain earnings for a future investment, sabbatical, or business move.
- You're approaching the VAT threshold and want a cleaner structure for VAT planning.
- You're tendering for clients (often enterprise or public sector) who require a Ltd company.
How to switch (high level)
- Form the Ltd company at gov.uk/limited-company-formation. ~£50, takes 24 hours.
- Open a business bank account — see options above.
- Register the Ltd for Corporation Tax within 3 months of starting to trade.
- Set up PAYE for your director salary (your accountant can do this).
- Transfer business assets from sole trader to Ltd if relevant (laptop, tools — at market value, which usually means £nominal). Your accountant handles the bookkeeping.
- Notify clients of the new Ltd company name on invoices going forward.
- Continue Self Assessment for the sole-trader period of the tax year, alongside the Ltd structure for the post-switch period. The first year is messy; year two is clean.
- De-register from Self Assessment as a sole trader once all sole-trader income has been declared (usually a year after switching).
Related: Inside vs outside IR35 · Umbrella vs limited company · Dividend tax rates 2025/26 · Day rate / IR35 calculator