Sole trader or limited company? They’re the two most common ways to run a small UK business. A sole trader is simpler and cheaper to run. A limited company protects your personal assets and lets you leave profit in the business.
An old rule says “go limited once profit passes £30,000”. If you take all the profit out, that rule doesn’t hold at 2026 to 2027 tax rates. This guide shows the real figures, then the other things that decide it.
Disclaimer: This article gives general information. It’s not tax or legal advice. Figures use 2026 to 2027 rates for England, Wales and Northern Ireland. Scotland’s Income Tax bands differ. Speak to a qualified accountant before you choose.
Quick Answer
Choose sole trader if you want simple admin and you’ll spend most of your profit. Choose a limited company to protect personal assets, keep profit in the business or look bigger to clients. On tax alone, a company now often costs more when you take every pound out.
What Is the Difference Between a Sole Trader and a Limited Company?
A sole trader is you, trading in your own name. You and the business are the same in law. A limited company is a separate legal person. It owns its money, signs its contracts and owes its debts. You own it as a shareholder and run it as a director.
Here’s how they compare side by side.
| Sole trader | Limited company | |
|---|---|---|
| Legal status | You are the business | The company is separate from you |
| Liability for debts | Unlimited, your home and savings are at risk | Limited to what you put in, unless you sign a personal guarantee |
| Tax on profit | Income Tax and Class 4 National Insurance | Corporation Tax, then tax on what you take out |
| How you take money | Drawings, any time | Salary, dividends or a director’s loan |
| Setting up | Register for Self Assessment | Register with Companies House, £100 online |
| Yearly filings | One Self Assessment return | Accounts, Company Tax Return, confirmation statement, and often your own tax return |
| Privacy | Your accounts stay private | Accounts and directors are public at Companies House |
Who Pays Less Tax: Sole Trader or Limited Company?
If you take all your profit out, the sole trader pays less at 2026 to 2027 rates. On £50,000 profit, a sole trader pays about £9,700. A company owner taking everything out pays about £11,100. The company wins only on profit you leave in it.
Here are the full figures. They assume one owner, no other income, and the 2026 to 2027 rates for England, Wales and Northern Ireland. The director takes a £12,570 salary and the rest as dividends.
| Profit | Sole trader: Income Tax + National Insurance | Limited company: all taxes, all profit taken out |
|---|---|---|
| £50,000 | £9,732 | £11,138 |
| £100,000 | £30,689 | £34,790 |
The sole trader figures use the Income Tax rates and the self-employed National Insurance rates for 2026 to 2027. Class 4 is 6% on profits between £12,570 and £50,270, then 2%.
The company figures add four things:
- employer National Insurance on the salary above £5,000
- Corporation Tax rates of 19% up to £50,000 and 25% over £250,000, with marginal relief between
- dividend tax rates of 10.75% and 35.75% for 2026 to 2027
- a £500 dividend allowance
A company with one director and no other staff can’t claim Employment Allowance. So the employer National Insurance on the salary is a real cost.
Why does the company lose? Employer National Insurance, Corporation Tax and dividend tax together cost more than Income Tax and Class 4. The dividend tax rise in April 2026 widened that gap.
When Does a Limited Company Save Tax?
A company saves tax when you leave profit inside it. A company with profit under £50,000 pays 19% Corporation Tax. A basic-rate sole trader pays 26% on the same pound. A higher-rate sole trader pays 42%. If you don’t need the profit now, a company pays less tax on it.
Take £1,000 of extra profit you don’t spend this year.
| Who earns the £1,000 | Tax now |
|---|---|
| Basic-rate sole trader (20% + 6%) | £260 |
| Higher-rate sole trader (40% + 2%) | £420 |
| Limited company with profit under £50,000, profit kept in the company | £190 |
You pay dividend tax later, when you take the money out. You choose when that happens. Taking it in a year with lower income can cut the bill.
A company also suits people who:
- want to reinvest profit in stock, staff or equipment
- pay into a pension through the company
- own the business with a spouse or partner as shareholders
- may sell the business one day
How Does Each One Pay You?
A sole trader takes drawings. Drawings are money you move from the business account to yourself. They aren’t an expense and they aren’t taxed. You pay tax on the profit instead. A director takes a salary, dividends or a director’s loan, and each one has its own tax rules.
Drawings are simple. You can take any amount, any time. But you pay tax on the whole year’s profit, even money you left in the account. Set aside about a quarter of your profit for the tax bill, more if you pay higher-rate tax.
Directors can’t just take company money. The money belongs to the company. Salary goes through payroll. Dividends need profit and a paper record.
Is Limited Liability Worth It?
For risky work, yes. A sole trader owes every business debt personally, so a big claim can reach your home and savings. A company’s debts stay with the company. Banks and landlords often ask directors for personal guarantees. A guarantee removes that protection.
Liability matters most in trades, construction, consulting and anything with large contracts. Business insurance helps either way.
GOV.UK says sole traders have unlimited liability. Check its guidance before you set up as a sole trader.
What Are the Downsides of a Limited Company?
More paperwork, more cost and less privacy. A company files accounts at Companies House, a Company Tax Return with HMRC and a confirmation statement each year. Most directors who take dividends also file their own Self Assessment return. Accountancy fees are usually higher. Your accounts and your name are public.
Directors also take on legal duties. If you get them wrong, a court can fine you or ban you from being a director.
A company’s money is not yours. Mixing it with your own spending creates a director’s loan and, sometimes, extra tax.
How Do You Start Each One?
Sole traders register for Self Assessment with HMRC once they earn over £1,000 in a tax year. Limited companies register with Companies House for £100 online, often within 24 hours. Either one must register for VAT once taxable turnover passes £90,000.
For sole traders, the main step is registering for Self Assessment. The deadline is 5 October after the end of your first tax year.
For a company, our guide on how to register a limited company covers the documents and each step.
When Should a Sole Trader Become a Limited Company?
Switch when you need limited liability or clients insist on a company. Switch when you can leave profit in the business, too. Don’t switch for tax alone if you spend all your profit. Run your own numbers first, because every pound you take as a dividend is taxed twice.
Good reasons to switch:
- your work carries real risk of a large claim
- a big client or agency only works with companies
- your profit is more than you need to live on
- you plan to hire staff, take on partners or sell
Switching takes planning. You close your sole trader business, form the company and move any assets across. Moving assets can create a tax bill unless the right relief applies. Get advice before you move anything.
We can run both sets of numbers for you first. Then we handle your limited company formation and payroll in one go, and help you open a business bank account.
Making the Choice
Start with three questions. How much profit will you make? How much will you spend? How much risk does your work carry?
If you’ll spend everything and the risk is low, stay a sole trader. If you’ll keep profit back, or the risk is high, a company makes sense.
DASA’s company registration service compares both options on your real numbers before you register. Tell us your expected profit and what you’ll take out. We’ll confirm which plan fits.
This article gives general information about business structures in the UK. Tax figures use 2026 to 2027 rates for England, Wales and Northern Ireland, one owner and no other income. They’re examples, not advice. Speak to a qualified accountant about your own situation.
Last reviewed October 2026 by Raqeeb Marzook, ACCA.
Frequently Asked Questions
Does a limited company pay less tax than a sole trader?
Not if you take all the profit out. At 2026 to 2027 rates, a sole trader on £50,000 profit pays about £9,700, against about £11,100 for a company owner who takes everything out.
When does a limited company save tax?
When you leave profit in the company. A company with profit under £50,000 pays 19%, against 26% for a basic-rate sole trader and 42% for a higher-rate one.
How does a sole trader pay themselves?
By taking drawings from the business account. Drawings aren’t taxed or deducted. You pay tax on the year’s profit instead.
Is a sole trader personally liable for business debts?
Yes. A sole trader has unlimited liability, so business debts can reach personal savings and property.
When should a sole trader become a limited company?
When you need limited liability, when clients insist on a company, or when you can leave profit in the business.