Sole Trader vs Limited Company (UK Guide)
Choosing between sole trader and limited company affects your tax, paperwork, legal protection, and how you take money out of the business.
This guide explains the main differences in plain English – including tax, responsibilities, setup costs and when one structure may be suitable than the other.
Sole Trader vs Limited Company: Key Differences
What is a Limited Company?
A limited company is a business structure that is legally separate from you personally. The company has its own responsibilities, bank account, tax filings and records.
What is a Sole Trader?
A sole trader is someone who runs a business as themselves (self-employed). You keep the profits after tax, but you’re also personally responsible for the business.
If your self-employed income goes over HMRC thresholds, you’ll usually need to register for Self Assessment.
Quick Comparison: Sole Trader vs Limited Company
| Topic | Sole Trader | Limited Company |
|---|---|---|
| Legal status | You and the business are legally the same | Company is legally separate from you |
| Liability | You’re personally responsible for business debts | Liability is usually limited to the company |
| Tax | Income Tax + National Insurance on profits | Corporation Tax on profits + personal tax on salary/dividends |
| Admin | Simpler | More admin + filing requirements |
| Privacy | Less public disclosure | Company details and accounts filed at Companies House |
| Best for | Simple businesses, lower admin and straightforward setup | Growth, protection, credibility and greater flexibility for tax planning |
Limited Company Tax (Corporation Tax, Salary & Dividends)
A limited company pays Corporation Tax on company profits. The rate depends on profit levels, with lower rates on smaller profits, higher rates on larger profits and marginal relief available in between.
Director/shareholders usually take money through a combination of salary and dividends, with the best mix depending on your profits, other income and long-term plans – which is why tax planning matters.
Dividends can only be paid from available company profits, so accurate bookkeeping and up-to-date accounts are important.
Admin & Compliance: What Changes?
Sole Trader Admin
Generally simpler:
-
Keep records, submit Self Assessment and pay Income Tax and National Insurance
- Fewer filing requirements than a limited company
-
Making Tax Digital for Income Tax starts 6 April 2026 for sole traders and landlords with qualifying income over £50,000, moving toward digital records + quarterly updates. Thresholds drop to £30,000 (April 2027) and £20,000 (April 2028).
Limited Company Admin
More formal requirements, including:
- Annual accounts filed with Companies House (including dormant companies).
- Corporation Tax returns submitted to HMRC
Directors approving and signing accounts before filing.
A confirmation statement must be filed at least once every year.
Which One Is Right for You?
A Sole Trader is often best if you want:
The simplest setup and lowest admin burden
To start trading quickly and cheaply
Your business has lower risk and liability exposure
You’re testing a business idea or are still early-stage
A Limited Company is often best if you want:
More protection (limited liability in many situations)
A structure that often feels more credible to larger clients, suppliers and lenders
More flexibility around tax planning and how you take money out
A setup that can support growth, staff, and longer-term plans