Should you operate as a sole trader or form a limited company? It's one of the first questions new business owners ask. The answer isn't the same for everyone, but there's a clear framework to think about it.
The Basic Difference
As a sole trader, you and your business are one legal entity. You pay income tax and National Insurance on your profit. You're personally liable if something goes wrong.
As a limited company, you're a separate legal entity. Your company pays Corporation Tax on profits. You pay yourself salary and/or dividends. You have limited liability if the company gets sued or goes into debt.
Mostly though, this is a tax question. Let's look at the maths.
Tax comparison at different profit levels
The exact answer depends on your specific circumstances — pension contributions, other income, spouse's income, whether you'd extract all profit or leave some in the company. The figures below are directional; we'll calculate yours precisely as part of any quote. All figures use 2026/27 UK rates.
Two structural facts to keep in mind throughout:
- Sole trader: profit is taxed once via income tax (20%/40%/45%) plus Class 4 NI (6% / 2%). Personal allowance applies. Personal allowance tapers above £100,000 income.
- Limited company: profit is taxed twice — corporation tax (19% on profits up to £50k, 25% above £250k, marginal relief between) and then dividend tax (8.75% / 33.75% / 39.35%) on what's extracted. Anything left in the company is deferred. The £500 dividend allowance is tax-free.
Under £30,000 profit: Sole trader is generally simpler and slightly cheaper on tax. The limited company structure has fixed admin costs (Companies House filings, payroll, accounts) that aren't worth the small tax saving at this level.
£30,000–£60,000 profit: The two are usually close. Sole trader still has a small edge in many cases. The limited company starts to be worth considering for non-tax reasons (credibility, liability, flexibility).
£60,000–£100,000 profit: Limited company tends to pull ahead, especially if you don't need to extract every penny each year. Leaving profit in the company at 19%–26.5% effective CT, then extracting later when your personal income is lower, can save meaningful tax over a few years.
Over £100,000 profit: Limited company typically wins decisively, particularly because sole trader income above £100,000 starts to taper your personal allowance away (a marginal effective rate of 60% in the £100,000–£125,140 band) — a problem the limited company structure can sidestep by keeping income below the taper threshold.
These are rules of thumb. The break-even point shifts each tax year, and individual circumstances move it further. The right answer for your business needs proper numbers run, not a generic comparison.
So When Should You Incorporate?
Based on pure tax:
- Under £50,000 profit: Sole trader is usually slightly better.
- £50,000-£80,000 profit: It's very close. Sole trader slightly better, but limited company gives flexibility.
- Over £80,000 profit: Limited company starts to win.
- Over £150,000 profit: Limited company clearly wins.
But it's not just about tax. Consider:
Credibility. Some clients prefer dealing with limited companies. "Ltd" after your name sounds more established.
Liability protection. As a sole trader, you're personally liable for business debts. With a limited company, usually only the company's assets are at risk.
Growth plans. If you're planning to raise investment or sell the business, limited company is better structured.
Admin burden. Limited companies have more filing requirements. Sole traders are simpler.
Flexibility. Limited companies let you keep profit in the company, use it for tax planning, or save it for lean months.
The Real Decision
If your profit is under £60,000 and you're happy doing your own accounts, sole trader is simpler. Once profit gets above that, the flexibility of a limited company becomes valuable even if tax is a wash.
Use our decision tool to think through your specific situation. Then talk to an accountant about the numbers. It's a conversation worth having.
And if you're already operating as a sole trader and profit is climbing, don't assume you're in the wrong structure. Run the numbers. Sometimes incorporating is worth it, sometimes it's not. You need to know your actual figures.