Sole trader or limited company? The honest version

Ask around and you'll get told, confidently and for free, that you should go limited. It sounds more professional. Your mate did it. Someone in the merchants said it saves you a fortune on tax.

Some of that was true a few years ago. Less of it is true now, and two changes in 2026 moved the numbers further in the other direction.

Here's the honest version, with the figures as they stand.

The short answer

Sole trader is simpler, costs nothing, and is the right answer for most people starting out.

A limited company buys you two things. A legal wall between the business's debts and your own house, which is real and sometimes matters a great deal. And, in some circumstances, a slightly lower overall tax bill — a gap that is narrower and less certain than the folklore suggests.

What it costs you is permanent admin. Not a form once. A different way of doing everything, forever.

What actually changes on a Tuesday

Before the tax, the practical, because this is what people underestimate.

The business's money stops being your money. As a sole trader, cash in the account is yours; you take what you need and pay tax on the profit. In a company, that money belongs to the company. You pay yourself, deliberately, as salary or dividends, and you record it. Taking money out because you fancy it is a director's loan and has its own tax consequences.

You get filing deadlines you didn't have. Annual accounts to Companies House nine months after your year end. A Company Tax Return within twelve months. Corporation Tax paid nine months and a day after the period ends. A confirmation statement every twelve months. Usually a payroll, which means submissions to HMRC every time you pay yourself. Miss those and there are automatic penalties.

Your business becomes public. Anyone can look your company up and see the filed balance sheet — what it owns, what it owes, what's been retained. Your name, month and year of birth and service address are on the register too. Turnover and profit are not on show while small companies can still file cut-down accounts. From April 2028 small and micro companies will have to file a profit and loss account, but the announced reforms include an option to keep it off the public register, so filing it and publishing it aren't the same thing — worth watching rather than worrying about.

You lose some simplifications. The £1,000 trading allowance, the cash basis, simplified expenses — all sole-trader things. Also worth knowing in the other direction: Making Tax Digital for Income Tax, which became mandatory for sole traders with over £50,000 of income in April 2026, doesn't apply to companies.

None of that is unmanageable. It is all extra, and it never stops.

The liability question, which is the real one

This is the strongest argument for a company and it gets muddled with insurance, so it's worth separating.

A sole trader and their business are the same legal person. If the business owes money it can't pay, the creditor can come after your personal assets. A limited company is a separate legal person: if it fails owing money, ordinarily that's where it stops.

Two honest qualifications. Directors who trade on while insolvent, or give personal guarantees, can be on the hook anyway — and banks and merchants routinely ask small company directors for personal guarantees, which quietly cancels the protection for that debt. And limited liability is not a substitute for insurance. If you flood a kitchen, the claim is against the business either way, and what pays it is your public liability cover, which you need whichever structure you pick. There's more on cover levels in the first-90-days admin checklist.

Where the wall genuinely earns its keep: large-value work, jobs where a failure could cost far more than the job was worth, employing people, or anything where you're carrying serious materials risk.

The tax bit, and why it got weaker

The old argument was that you take a small salary and the rest as dividends, paying less than you would on trading profit. It still works arithmetically. It works less well than it did.

Corporation tax. 19% on profits up to £50,000. Above £250,000 it's 25%. In between there's marginal relief, which produces an effective rate of 26.5% on the slice between the two — higher than the main rate, which surprises people who assume the jump is to 25%.

Dividends went up in April 2026. The rates are now 10.75% at the ordinary rate and 35.75% at the upper rate, both two points higher than the year before. The additional rate stayed at 39.35%. The tax-free dividend allowance is £500.

The Employment Allowance trap. The £10,500 Employment Allowance offsets employer National Insurance, which a company pays at 15% above £5,000 of salary. But if your company has one director and that director is the only employee liable for it, you cannot claim it. The relief that would offset the cost is precisely the one the one-person company is excluded from.

Put together: the money has to survive corporation tax, then dividend tax, and the employer's National Insurance on any salary above the threshold isn't relieved. Against that, a sole trader pays income tax and Class 4 National Insurance at 6% between £12,570 and £50,270, and 2% above.

The gap still exists at some profit levels. It is a few hundred pounds where it used to be a few thousand, and an accountant's extra fee eats a good part of it.

If you're in Scotland, the comparison tables are wrong

This is the part that isn't in the generic guides, and central-belt traders are exactly who it catches.

Scotland sets its own income tax bands on earned and trading income. A Scottish sole trader pays 19% and 20% on the lower slices, 21% from £29,527, and 42% from £43,663 — where an English trader is still on 20% until £50,270 and then 40%.

But dividends are taxed at UK-wide rates wherever you live. So a Scottish trader taking profits as dividends from a company sidesteps a band structure that would have cost them more on the same profit as a sole trader.

The direction of that is obvious; the size of it isn't, and I'm not going to model it, because it depends on how much you take out, when, and what else you have coming in. What I'd say plainly is this: if you're in Scotland, do not make this decision off a comparison table you found online, because essentially all of them use the rest-of-UK bands. It is worth an hour of an accountant's time to run your actual numbers, and that is a cheaper hour than most.

What a company costs

To start: £100 to incorporate online with Companies House. £124 on paper, so don't do it on paper.

Every year: £50 for the confirmation statement. Filing accounts costs nothing.

Accountancy is the real number, and I'm not going to quote one, because every figure available comes from firms advertising the service. What's reliably true is that it goes up. A company needs statutory accounts, a Company Tax Return and usually payroll, none of which a sole-trader return involves. Get quotes before you decide, not after.

Two recent changes worth knowing about. HMRC's free filing service for small company accounts and tax returns closed on 31 March 2026, so companies that used to file for nothing now need commercial software or an accountant. And identity verification at Companies House became a legal requirement in November 2025. New directors verify before they can be appointed; existing directors verify at their next confirmation statement, with the transition period ending around 18 November 2026. It's free through GOV.UK One Login. Acting as a director without being verified is an offence, so if you incorporated a while ago and haven't done it, that deadline is close.

Subbies: the CIS difference nobody mentions

If you work under the Construction Industry Scheme, the deduction rate is the same either way — 20% registered, 30% if you're not. It bites on what's left after the contractor strips out VAT, plant hire and your materials, and "your materials" means what they cost you rather than what you charged. Any margin you added to them is treated as income and deducted from accordingly, which is its own trap and covered properly here.

What differs is how you get it back, and it's a cash-flow difference rather than a tax one.

A sole trader offsets CIS deductions against the income tax and Class 4 National Insurance bill on their Self Assessment return, and gets a repayment if there's more deducted than owed.

A limited company offsets them against PAYE and National Insurance through the monthly payroll submission. It cannot set them straight against corporation tax. If the deductions exceed what the payroll owes — which is exactly the position of a subbie company with one director on a small salary — the excess is claimed as a refund after the tax year ends, once everything's filed.

So a company can be sitting on a meaningful sum of its own money until well after 5 April. For a subcontractor with tight working capital, that's a real argument, and it points towards staying a sole trader.

IR35 is not your problem. Something else might be.

Worth clearing up, because it causes unnecessary worry.

The off-payroll rules need an intermediary — typically your own limited company — between you and the client. A sole trader contracting directly has no intermediary, so the rules cannot apply, whoever the customer is. And they don't apply at all where the client is a private individual having work done on their own home.

If you do work through your own company for another trade business, the rules technically exist, but because virtually every trade firm counts as a small client, the decision and the liability stay with your own company rather than with them.

The genuine risk that people confuse with this is employment status: being treated as self-employed when the working relationship is really employment. Being CIS-registered is not protection — HMRC's own manuals say so in terms, more than once. And the exposure lands on the contractor who engaged you, not on you, which is why some of them are careful about it.

So when does it start to pay?

You'll want a number. There isn't one, and the people best placed to give you one deliberately won't.

The Association of Taxation Technicians says the point depends on how many people are involved and how much profit you take out. The Low Incomes Tax Reform Group goes further and warns you not to be swayed by people telling you a company is more tax efficient, because the benefits are "often overstated". The old rules of thumb — £30,000, £40,000 — trace back to advice from around 2015, and the person who wrote it was already withdrawing it the following year when dividend taxation first changed. Three tax rises have happened since.

What actually decides it, in rough order of how often it's the real reason:

1. Somebody requires it. A main contractor or commercial client that won't engage a sole trader. This is the most common genuine trigger and it has nothing to do with tax.
2. The liability is worth insuring against structurally, because of the size or nature of the work.
3. Your profit is comfortably above what you need to live on, so retaining some in the company to smooth a lumpy year is useful.
4. The tax difference, last, and smaller than you've been told.

If none of the first three apply, the fourth on its own rarely justifies it now.

Starting simple is not a lesser choice

The thing worth saying to anyone agonising over this in their first month: you can change your mind.

Moving from sole trader to a company later is ordinary. Most traders who end up incorporated did it after a few years, when the business had a shape worth protecting — a van, staff, a book of commercial work. Incorporating is a stability event, not a birth certificate, and nobody looks at a company formed in year four and thinks less of it.

Going the other way, unwinding a company back to sole trader, is more awkward and can carry tax costs. That asymmetry is a quiet argument for starting simple and moving when there's a reason.

Whichever you pick, the job is the same: get the work in, price it properly, invoice it promptly, and keep records good enough that whoever does your tax return isn't guessing. That part doesn't care what's on your letterhead — grafter.ly handles it the same either way, and you can try it free for 30 days, no card to start.

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Sources. GOV.UK on Income Tax rates, Scottish Income Tax, self-employed National Insurance, the trading allowance, Making Tax Digital for Income Tax, Corporation Tax rates and marginal relief, tax on dividends, employer rates and thresholds for 2026/27, Employment Allowance eligibility, Companies House fees, accounts filing deadlines, the April 2028 accounts changes, identity verification and CIS refunds for limited companies; the November 2025 Budget technical note on dividend rates; HMRC's manuals on CIS and materials and CIS registration and employment status; ITEPA 2003 Part 2 Chapter 10 on off-payroll working; the Association of Taxation Technicians' briefing on setting up a business and the Low Incomes Tax Reform Group's guidance on limited companies. All figures checked 10 September 2026 and current for the 2026/27 tax year.

This is general information about how the two structures differ, not advice about your situation. The decision turns on your own numbers, and an hour with an accountant before you commit is money well spent — particularly in Scotland, where the bands differ.