The question everyone asks, and why the answer isn't just about tax
This is usually the first big decision anyone starting a business has to make, and it's often treated as a pure tax calculation. Tax matters, and we'll get into the numbers — but the honest answer is that the right structure depends on your profit level, your plans for the business, and how much admin and formality you're willing to take on.
How each one is actually taxed
Sole trader: all your business profit is simply added to your other income and taxed as you, personally, at the standard income tax rates for 2026/27 — 20% up to £37,700 above your personal allowance, 40% up to £125,140, and 45% above that. On top, you pay Class 4 National Insurance at 6% on profits between £12,570 and £50,270, and 2% above that. There's no separate "company" step — you and the business are legally the same thing.
Limited company: the company itself pays corporation tax on its profits — 19% up to £50,000, 25% above £250,000, with marginal relief tapering the rate in between. You then extract money for yourself, typically as a combination of a small salary (usually kept around the National Insurance thresholds to avoid unnecessary contributions) and dividends, which carry their own dividend allowance (£500) and dividend tax rates on top (10.75% basic rate, 35.75% higher rate, 39.35% additional rate, for 2026/27).
Where the numbers tend to land
As a general pattern: at lower profit levels (roughly up to £30,000–£40,000), the tax difference between the two structures is often fairly modest once you account for the extra admin of running a company — sole trader can be perfectly efficient, and considerably simpler. As profits climb higher, particularly once you're consistently retaining profit in the business rather than needing it all personally, a limited company structure usually pulls ahead — corporation tax rates are lower than higher and additional rate income tax, and you get more control over when and how you extract income (and therefore when you pay personal tax on it).
These break-even points move whenever rates change — as they did for dividend tax in April 2026 — so "sole trader up to £X, then switch" isn't a fixed rule. It's worth recalculating against current rates rather than relying on a rule of thumb from a few years ago.
The non-tax factors that matter just as much
- Limited liability — a limited company is a separate legal entity, meaning your personal assets are generally protected if the business runs into financial or legal trouble. As a sole trader, you and the business are legally the same, so your personal assets are exposed.
- Perception and contracts — some clients, particularly larger ones, prefer or require dealing with a limited company rather than a sole trader.
- Admin burden — a limited company means Companies House filings, statutory accounts, a corporation tax return, and generally higher accountancy fees than a sole trader's Self Assessment-only setup.
- Flexibility to bring in others — a limited company makes it far easier to bring in co-founders, investors or family members as shareholders than a sole trader structure does.
- Reversibility — moving from sole trader to limited company later is a well-trodden, manageable path. Moving the other way is messier, so there's little cost to starting simple if you're genuinely unsure.
Our honest take
If you're testing an idea, working solo, and profits are modest, sole trader is often the sensible starting point — simple, cheap, and quick to set up. Once profits are consistently strong, you're carrying real commercial risk, or you're planning to grow, bring in others, or eventually sell the business, a limited company structure usually earns its extra admin. The number that actually matters is yours specifically — send us your projected profit and we'll run the real comparison rather than a generic rule of thumb.