Home / Starting a business / Sole Trader vs Limited Company

Starting a business in the UK

One business idea. Two very different ways to run it.

Should you start as a sole trader or form a limited company? The right answer is not simply “which one pays less tax”. It depends on risk, how much money you need personally, growth plans, clients, administration and what you want the business to become.

Before you decide

Four questions matter more than a headline tax saving.

Who is legally responsible?Sole trader and company structures treat you and the business differently. How much profit will you take personally?Keeping profits in a company can produce a different answer from extracting everything. What are you building?A small side business and a business taking investment may need different structures. What reporting will apply?Self-employed MTD rules and company obligations are not the same.

Compare the tax illustration Try the structure checker

Choose your question

Start with the decision you are actually trying to make.

This page is designed to be useful before you speak to an accountant.

Free decision guideRead, compare, calculate, then ask us if you want the result checked.

Sole trader

What does self-employed actually mean?

Understand the simplest UK business structure and what you are personally responsible for.

Understand sole trader Limited company

What changes when I form a company?

See the legal separation, director responsibilities and how company money works.

Understand a company Side by side

Sole trader vs limited company.

Compare tax, liability, administration, privacy, funding and how money is taken out.

Compare structures Interactive tax tool

Compare the same business profit.

See an educational 2026/27 tax illustration for a sole trader and a one-director company.

Open calculator Expenses

Which flat-rate expenses are available?

See simplified expenses for sole traders and the different reimbursement rules for companies.

See current rates Decision checker

Which structure deserves a closer look?

Answer six practical questions about risk, cash, growth and administration.

Start checker

What is self-employment?

A sole trader is you running a business in your own name.

You work for yourself, make the business decisions and are personally responsible for the business. GOV.UK describes sole trader as the simplest business structure to set up and keep records for.

How it works

Sole trader

You and the business are not separate legal persons.
You keep the profits after your personal tax.
You are personally responsible for business debts.
You report the business through Self Assessment.
You must keep business records.
You can employ staff.

Registration pointYou generally need to register as a sole trader for Self Assessment if your gross trading income is more than £1,000 in a tax year, subject to the detailed rules.

Often attractive when

Simplicity matters

You are testing a new business idea.
The business is relatively straightforward.
You want low administration.
You expect to take most of the profits personally.
There is limited need for investors or multiple share owners.
Your commercial risk is manageable and properly insured.

RememberSimple does not mean informal. You still need proper records, tax filings and MTD compliance if you fall within the rules.

What is a limited company?

The company is a separate legal entity from the people who own and run it.

A company has its own legal identity. Shareholders own shares in it, directors manage it, and the company has its own accounts, Corporation Tax and Companies House obligations.

How it works

Private limited company

The company is legally separate from shareholders and directors.
The company normally has its own bank account and records.
Company profit belongs to the company first.
Directors can receive salary, properly declared dividends and other legitimate payments.
Annual accounts and company filings are required.
Directors remain responsible for making sure the company meets its obligations.

Limited liabilityShareholder liability is generally limited, but this does not remove all personal risk. Personal guarantees and director conduct can still matter.

Often attractive when

Separation and growth matter

The business has greater commercial or contractual risk.
You want to retain some profits for future growth.
You may bring in another shareholder or investor.
You want a structure that can continue separately from you.
Important customers expect to contract with a company.
You are comfortable with more formal administration.

RememberForming a company is not automatically a tax-saving exercise. The extraction strategy and ongoing administration can change the result.

Side-by-side comparison

Sole trader vs limited company in plain English.

Question	Sole trader	Limited company
Who is the business?	You are the business.	The company is legally separate from you.
Who owns it?	You own the business personally.	Shareholders own shares in the company.
Who runs it?	You run it.	Directors manage the company.
How is profit taxed?	Business profit forms part of your personal taxable income.	The company pays Corporation Tax. You may then pay personal tax on salary, dividends or other extraction.
Can profit stay in the business?	The profit is still your personal taxable business profit even if cash stays in the business bank account.	Post-tax company profit can remain in the company rather than being paid immediately to the shareholder.
Business debts	You are personally responsible for the business debts.	The company is normally responsible for its debts, subject to the legal rules and any personal guarantees.
Accounts and filings	Generally simpler, with Self Assessment and MTD where applicable.	Annual company accounts, Corporation Tax, Companies House obligations, and payroll where salary is paid.
Public information	No Companies House company accounts.	Company information and required filings appear on the public register.
Taking money out	You can draw business cash personally. Drawings do not change taxable profit.	Company money must be taken out in the correct form, such as salary, dividend, expense repayment or loan repayment.
Bringing in owners	Not designed around shares.	Shares can be used to define company ownership, subject to company law and tax rules.

Same business, same commercial profit

The first calculation is the same. The tax route is different.

Imagine a business has £90,000 of sales and £30,000 of ordinary business costs. Before considering the owner's remuneration and tax, the commercial profit is £60,000.

This is where many comparisons go wrong.

A company does not simply pay 19% Corporation Tax and finish. If the owner wants the money personally, salary, employer National Insurance and dividend tax may also matter.

Simple £60,000 profit example

Sales£90,000

Ordinary business costs£30,000

Commercial profit before owner remuneration and tax£60,000

Sole trader: the £60,000 business profit is the starting point for the owner's personal Income Tax and Class 4 National Insurance calculation.

Limited company: director salary and employer costs can reduce the company's taxable profit, the company then pays Corporation Tax, and dividends can only come from profits available for distribution. The shareholder may also pay dividend tax.

2026 to 2027 interactive illustration

Compare the same pre-owner-remuneration business profit.

This calculator deliberately uses one transparent limited-company scenario so you can see why there is no universal “go limited at £X” answer.

Sole trader vs one-director company

Rates used

Current 2026/27 figures used in this comparison include:

Personal Allowance	£12,570
Self-employed Class 4 NIC	6% / 2%
Employer NIC rate	15% above £5,000
Corporation Tax	19% / Marginal Relief / 25%
Dividend allowance	£500
Dividend rates	10.75% / 35.75% / 39.35%

Do not choose your structure from this calculator alone.

It does not model pensions, retained profits, spouses or other shareholders, associated companies, other personal income, student loans, losses, benefits, IR35 or accountancy costs.

When each structure can make sense

No fixed profit threshold replaces a proper decision.

The tax result matters, but so do commercial risk, cash requirements, growth and administration.

Staying self-employed may make sense when

You are starting small or testing the market.
You want the simplest administration.
You need to take most of the business cash personally.
The business has relatively low commercial risk.
You do not need shares or outside investors.
The extra company administration would outweigh the practical benefit.

A limited company deserves a closer look when

Legal separation and limited liability are commercially important.
You can retain some profits rather than extract everything personally.
You want to bring in shareholders or investment.
The business is growing and needs a more formal structure.
Major customers prefer or require a company.
You want to build a business that can continue separately from you.

SV&Co position: incorporation should solve a real problem.We would rather tell a client to remain a sole trader when that is the better fit than create a company purely because somebody quoted an outdated “tax-saving threshold”.

Flat-rate and simplified expenses

The rules are different for sole traders and limited companies.

HMRC's “simplified expenses” regime is for sole traders and qualifying partnerships. Limited companies cannot use that regime, but companies can use certain employer reimbursement rates where the conditions are met.

Sole trader simplified expenses

Car or goods vehicle, first 10,000 business miles	55p per mile
Car or goods vehicle, after 10,000 business miles	25p per mile
Motorcycle	24p per mile
Working from home 25 to 50 hours per month	£10 per month
Working from home 51 to 100 hours per month	£18 per month
Working from home 101+ hours per month	£26 per month

The mileage method has restrictions, including where capital allowances or actual vehicle costs have already been used for that vehicle. Working-from-home flat rates do not include telephone or internet costs.

Limited company director or employee

Private car or van, first 10,000 qualifying business miles	55p per mile
Private car or van, after 10,000 business miles	25p per mile
Motorcycle	24p per mile
Bicycle	20p per mile
Employer-paid homeworking amount, where conditions are met	£6 per week / £26 per month

These are not the sole-trader simplified-expense rules. They are employer and employee reimbursement rules. From 6 April 2026 employees can no longer claim new homeworking tax relief directly from HMRC, but qualifying employer reimbursements can still be exempt.

HMRC simplified expenses HMRC mileage rates Employer homeworking rules

Making Tax Digital

The digital reporting position can also affect your choice and systems.

Sole trader

MTD for Income Tax is now mandatory for some sole traders and landlords based on qualifying income.

Over £50,000 qualifying income, from April 2026.
Over £30,000, from April 2027.
Over £20,000, from April 2028.

A sole trader within MTD needs compatible software and digital records for the relevant business.

Limited company

MTD for Income Tax does not apply to limited-company trading profits because those profits fall within Corporation Tax, not the individual's self-employed Income Tax business.

The company can still have digital obligations such as MTD for VAT if VAT registered, plus company accounts, Corporation Tax, payroll and Companies House filings.

Sole trader vs Ltd FAQs

Questions new business owners regularly ask.

At what profit should I become a limited company?

There is no fixed profit threshold that works for everyone. Current tax rates, how much money you extract, other personal income, whether profits can stay in the business, liability, administration and future plans all affect the answer.

Is a limited company always more tax efficient?

No. A company first pays Corporation Tax and the owner can then face tax when money is extracted. With current dividend and employer National Insurance rates, the answer depends heavily on the circumstances.

Can I start as a sole trader and become a company later?

Yes. Many businesses start as sole traders and incorporate later. The change should be planned because assets, contracts, VAT, payroll, goodwill and tax can all need consideration.

Can I claim the same expenses in both structures?

Many genuine business costs can be relevant under both structures, but the legal and tax mechanism is not always the same. Sole-trader simplified expenses, company reimbursements, benefits and director transactions follow different rules.

Does a limited company protect all of my personal assets?

A company provides legal separation and shareholder liability is generally limited, but protection is not absolute. Personal guarantees, wrongful conduct and other circumstances can still create personal exposure.

Does MTD make a limited company better?

No. MTD is a compliance factor, not a reason on its own to incorporate. A company has its own separate compliance requirements.

Reviewed by

Sandip Vadher, PhD FCCA

Founder of SV&Co Accountancy. Fellow Chartered Certified Accountant with more than 20 years of finance and accountancy experience.

Business Structure Review

Do not form a company just because somebody told you it saves tax.

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Current official sources used for this draft: sole trader, limited company formation, separate company legal identity, Income Tax, National Insurance, Corporation Tax, dividend tax, simplified expenses. Rates checked 16 August 2026. The final WordPress build will read rates from the central SV&Co tax-rates record monitored against GOV.UK.