Sole trader or limited company

GOV.UK puts the core difference simply. As a sole trader, "you are personally responsible for all of the debts of the business", and you keep all the profits after paying tax. A limited company, by contrast, "is legally separate from the people who own it", and its owners "are responsible for the debts of the business only up to the value of their financial investment."

That separation works in both directions. The money in a company's bank account belongs to the company, not to you, so you can only take it out in recognised ways such as a salary, dividends or a director's loan, each with its own tax treatment. A sole trader, on the other hand, can simply draw money from the business, because the business and the person are the same for tax.

For a sole trader, profit is added to any other income and taxed at the normal income tax rates after the £12,570 personal allowance, with Class 4 National Insurance on top. For a company, profit is first taxed through corporation tax. Whatever you then take out is taxed again in your hands, as salary through payroll or as dividends on your personal return. GOV.UK confirms that a company "cannot count dividends as business costs" when it works out its corporation tax.

The figures below are for 2026/27 in England, Wales and Northern Ireland. Scottish taxpayers have different income tax bands on earnings, but the same dividend rates.

A sole trader keeps records and files a self assessment return. From 6 April 2026, sole traders and landlords with gross income of more than £50,000 from self-employment and property are also in Making Tax Digital for Income Tax, with the threshold falling to more than £30,000 from April 2027 and more than £20,000 from April 2028. Our Making Tax Digital checklist explains what that involves.

A company has a longer list. It pays £100 to incorporate online, files annual accounts with Companies House, sends a company tax return to HMRC, files a confirmation statement at least every 12 months, and usually runs payroll for its directors. Every director must also verify their identity with Companies House. Many directors also need a personal tax return, for example if they receive more than £10,000 in dividends. Our guide to limited company filing deadlines sets out the dates, and accountants' fees for a company are usually higher, as our limited company accountant fees guide shows.

There is no profit figure at which a company automatically becomes the right answer, and we do not suggest one. The points people usually weigh up are:

• how much profit the business makes, and whether you need to take all of it out each year or can leave some in the company
• how much risk the work carries, and how much the limited liability of a company matters to you
• whether you plan to bring in co-owners or investors, which is easier with shares
• whether clients or agencies prefer to deal with a company; contractors should also read GOV.UK's guidance on the off-payroll working rules
• how much time, or accountancy cost, the extra filings will take
• your other income, and whether you are a Scottish taxpayer

Because the answer turns on your own numbers, it is a question to put to an accountant, ideally with a forecast of your profits. Our page on accountants for limited companies explains what that work usually covers, and paying yourself from a limited company looks at how directors take money out.

You are not locked in. GOV.UK says "you can move from one business structure to another", adding that it is "usually easier to move from being a sole trader to a limited company". Many people start as sole traders and look again once the business is established. If you would like to talk it through, we read every enquiry and, where we can, put you in touch with a local accountant; how it works explains the process.