Starting a business can feel overwhelming, especially when you’re making decisions that will affect your tax, legal responsibilities, and future growth.
One of the biggest early choices is your legal structure. Whether you operate as a sole trader or set up a limited company will impact:
- how you’re taxed
- how much personal risk you take on
- how easy it is to raise finance or bring in investors
- how your business is perceived by clients and suppliers
Choosing the wrong structure can create long-term headaches (and sometimes limit opportunities), so it’s worth understanding both options properly before you commit.
So, what’s the difference between a sole trader and a limited company, and which one is right for you?
What is a limited company?
A limited company is a business with its own legal identity, separate from the people who own it.
That separation matters because the company’s assets and liabilities belong to the company, not you personally. In most cases, shareholders and directors aren’t personally responsible for company debts or losses, their liability is generally limited to the value of what they’ve invested.
Need help deciding if going to Ltd makes sense? Speak to a limited company accountant at Accounting People Ltd.
How is a limited company set up?
A limited company is owned by its shareholders, and ownership is split into portions (shares) based on how much each shareholder has invested. You can have one shareholder or multiple shareholders.
Typical steps to set up include:
- Choose a simple, unique business name
- Appoint company officers, including at least one director. Directors manage the company in line with the law and company policies and are responsible for preparing annual accounts in line with the Companies Act 2006.
- Document how the company will run, including details of directors, shareholders, and responsibilities
- Register with Companies House by submitting:
- Articles of Association
- Memorandum of Association (covering details such as business activities and ownership structure)
- Once registered, your company can start trading
What taxes does a limited company pay?
Limited companies usually pay:
- Corporation Tax on business profits
- Potentially VAT (depending on turnover and activities)
- Potentially Employer National Insurance if employing staff
You don’t pay Income Tax “as the company” but you may pay Income Tax and National Insurance personally if you take money out as a salary (e.g., as a director). It’s possible for an owner-director to have tax/NIC considerations both from company payroll and personal income, depending on how they’re paid.
How are limited company taxes calculated?
Corporation Tax rates (from April 2023 onwards) work like this:
- 25% main rate for profits over £250,000
- 19% small profits rate for profits of £50,000 or less
- A tapered “marginal relief” applies between £50,000 and £250,000
Many directors choose a combination of salary + dividends, which can reduce personal tax and National Insurance compared with taking everything as salary (depending on your profit level and personal situation).
What is a sole trader?
A sole trader is a self-employed person running a business in their own name (or trading name). Because it’s not incorporated, it’s often considered the simplest structure.
Even if you hire workers, the business is still owned and run by one person. Legally, you and the business are the same entity, which means:
- you keep the profits after tax
- but you also take full personal responsibility for business decisions, debts, and liabilities (unlimited liability)
Sole traders are common in specialist trades and services (e.g., plumbers, electricians, hairdressers).
Also, unlike limited companies, sole traders can generally move money in and out of the business more freely (there isn’t the same separation between “company money” and “personal money”).
Do you want tailored advice for your situation? Get in touch with a sole trader accountant at Accounting People Ltd.
How do I register as a sole trader?
Starting as a sole trader is usually straightforward. You can do it full-time, or alongside employment.
Key steps include:
- Understand what self-employment means, including:
- your tax obligations
- what records you need to keep
- whether sole trader is the best structure for your goals
- Choose a business name to trade under
- Register for Self-Assessment with HMRC (typically via your Government Gateway account)
- Register for VAT if your turnover exceeds the threshold
- VAT registration threshold is £90,000 (2026/27)
What taxes do sole traders pay?
Sole traders typically pay:
- Income Tax on taxable profits
- National Insurance contributions
- VAT (if registered / required to register)
You can reduce taxable profit by claiming allowable business expenses such as travel, marketing, materials/stock, business-use phone/internet, utilities, and rent for business premises.
For tax purposes, your profits should be prepared properly and in line with relevant accounting standards (UK GAAP where applicable).
How are sole trader taxes calculated?
How much tax you pay depends on your annual profits and which tax band your taxable income falls into.
For the 2026/27 tax year, the standard Personal Allowance is £12,570.
Income Tax rates (England, Wales, Northern Ireland) for 2026/27
| Taxable income | Rate | Band |
| Up to £12,570 | 0% | Personal Allowance |
| £12,571 – £50,270 | 20% | Basic rate |
| £50,271 – £125,140 | 40% | Higher rate |
| £125,140+ | 45% | Additional rate |
(Income tax bands differ in Scotland.)
National Insurance (self-employed) snapshot for 2026/27
- If profits are £6,845 or more, Class 2 is treated as paid to protect your NI record (so you don’t usually pay it).
- If profits are over £12,570, you pay Class 4 NICs:
- 6% on profits £12,570 to £50,270
- 2% on profits over £50,270
Sole trader vs limited company: advantages and disadvantages
When choosing between the two, it’s about balancing simplicity, risk, tax efficiency, admin, and growth plans.
Sole trader
Advantages
- Easy to set up and run
- No need to file accounts with Companies House (more privacy)
- No need to register as an employer if working alone
- Easy to close the business if you stop trading
Disadvantages
- Fewer opportunities for tax relief
- Profits taxed using Income Tax rates (can be higher than Corporation Tax)
- You’re personally liable for business debts
- Can be harder to access finance/credit (a personal guarantee isn’t always enough)
- Business may end if the owner dies
Limited company
Advantages
- Limited liability can protect personal assets
- Separate legal entity (stronger legal/financial separation)
- Potentially more tax-efficient via Corporation Tax (19% small profits rate; 25% main rate)
- Often easier to raise finance and bring in investors
- Multiple directors/shareholders can add flexibility
Disadvantages
- More complex to set up and run
- Must file annual accounts and records with Companies House (publicly available)
- Higher ongoing costs to run and close
- More compliance and paperwork
Choosing between a sole trader and a limited company
There’s no one-size-fits-all answer. Your best option usually depends on:
- expected profits now (and in 12–24 months)
- whether you want to bring in investors or a co-founder
- how much personal risk you’re comfortable with
- whether you want clearer separation between personal and business finances
- your longer-term plan (growth, sale of business, hiring staff, etc.)
Limited company structures are often a strong fit for growth-focused businesses that want more protection and clearer separation between personal and business assets.
Sole trader status is popular with freelancers, tradespeople, and smaller businesses because it’s simple and flexible, but it comes with personal exposure to debts and liabilities.
If you’re not sure where to begin, an accountant can help you run the numbers and choose the most sensible structure.
Get expert business structure advice from Accounting People Ltd
At Accounting People Ltd, we help UK business owners choose the right setup, whether that’s a sole trader or limited company, based on what matters most to you: tax efficiency, protection, admin burden, and growth plans.
We’ll guide you through the decision, explain the implications clearly, and help you set up the structure that supports your goals.
Ready to take the next step?
Call us on 0333 023 1300 or complete our enquiry form and we’ll be in touch.
You may also be interested in: How to boost your small business cash flow.
Is a limited company better than being self-employed?
It can be especially if you plan to scale, want stronger protection against personal liability, and would benefit from additional options around pay structure and access to finance. But it depends on your goals, profits, and personal circumstances.
Which is more tax efficient: sole trader or limited company?
A limited company can be more tax-efficient in some cases, particularly at higher profit levels, because Corporation Tax can be lower than higher-rate Income Tax. Directors can also use a salary + dividend approach to manage tax and NIC exposure.
Can one person be a limited company?
Yes. In the UK, one person can set up a limited company and be both the sole director and sole shareholder (no special HMRC permission is required—your company just needs to be registered properly with Companies House).
When should I set up a Ltd company?
If you want to grow, raise capital, protect personal assets, improve access to finance, or plan to sell the business in future, it may be time to consider incorporating. Always weigh this against the added admin and compliance.
Do I need a business bank account as a sole trader?
It’s not legally required, but it’s often a smart move. It helps separate business income/expenses from personal spending, makes bookkeeping easier, and some personal bank accounts restrict business use.
