Key takeaways
- A sole trader pays Income Tax and Class 4 National Insurance on all profit, whether or not it is taken out.
- A company pays Corporation Tax on its profit, and you then pay personal tax on what you take out as salary or dividends.
- The main tax advantage of a company comes from profit left in the business; if you need all the profit to live on, the saving is usually smaller.
- You can start as a sole trader and form a company later, but moving an existing business needs planning.
Rates are for the 2026 to 2027 tax year.
There is no single level of profit at which a limited company becomes the better choice. Tax is one part of the decision; the others are personal liability, paperwork, privacy and how you want to take money out of the business. This guide sets out the main differences so you can see which questions matter for you.
The main differences
| Sole trader | Limited company | |
|---|---|---|
| Legal status | You and the business are the same person | The company is legally separate from you, even though you own and run it |
| Liability for business debts | You are personally liable, with no upper limit | Usually limited to what you have invested, unless you have personally guaranteed a loan or lease |
| Tax on profits | Income Tax and National Insurance on all profit, whether or not you take it out | Corporation Tax on company profit, then personal tax on what you take out as salary or dividends |
| Annual filing | Self Assessment tax return | Accounts and confirmation statement at Companies House, Company Tax Return, payroll if you take a salary, and your own personal tax return if you take dividends |
| Privacy | Your accounts are private | Your accounts, your name as a director and a correspondence address are published online by Companies House |
| Making Tax Digital for Income Tax | Applies once your income is over the threshold | Does not apply to the company, although you may still be in it personally for rental or other self-employed income |
How the tax works
As a sole trader, your profit is added to any other income. The first £12,570 is tax free; above that you pay Income Tax at 20% at the basic rate, 40% at the higher rate and 45% at the additional rate (these are the rates for England, Wales and Northern Ireland; Scotland has its own Income Tax rates). You also pay Class 4 National Insurance of 6% on profits between £12,570 and £50,270, and 2% above that.
As a limited company, the company pays Corporation Tax of 19% on profits up to £50,000 and 25% on profits over £250,000, with a rate between the two for profits in the middle. These limits are reduced if the accounting period is shorter than 12 months, and if you own or control more than one company, the limits are split between them. You then pay personal tax on what you take out. Most directors use a mix of salary and dividends, which we explain in our guide to paying yourself as a company director.
The main tax advantage of a company comes from profit you leave in the business, because it is taxed at the Corporation Tax rate rather than your personal rate. If you need all the profit to live on, the saving is usually smaller, and sometimes there is none once the extra running costs are included.
When a limited company may suit you
- Your profits are comfortably more than you need to take out each year.
- You want to protect your home and savings if the business fails or is sued
- Customers, suppliers or contracts in your sector expect to deal with a company.
- You plan to bring in a business partner or investor.
When staying a sole trader may suit you
- Your profits are modest, or you need most of them to live on.
- You value simplicity and lower running costs.
- You would rather keep your business finances off a public register.
Changing later
You can start as a sole trader and form a company later. Moving an existing business into a company needs planning, because moving equipment, property or the trading business itself into the company can trigger tax of its own.
How we can help
We can work out both options using your own figures, including the running costs of each, and set out the result in plain terms before you decide. If you would like us to look at your position, please get in touch.
Sources
This guide is general information, not personal advice. Rules change, so check the last-reviewed date. If you would like to talk through how it applies to you, we are happy to help.
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