Sole trader vs limited company

The headline trade-off

Sole trader is the simplest UK business structure: you and the business are the same legal entity. A limited company is a separate legal entity that you own and control through shares.

Sole trader wins on simplicity and cost. Limited company wins on liability protection, tax flexibility at higher profits, and credibility with larger customers.

Sole trader: pros and cons

Pros

• Simple to set up — register with HMRC, that's it
• Lower compliance costs (no Companies House filings)
• Profits taxed once, on your Self Assessment
• Losses can be offset against other personal income
• Privacy — no public filings

Cons

• Unlimited personal liability — your personal assets are at risk if the business fails
• Higher tax at higher incomes — no flexibility on when to take profits
• Some clients won't engage with sole traders for larger contracts

Limited company: pros and cons

Pros

• Limited liability — personal assets protected (with some exceptions)
• Corporation Tax rates can be lower than higher-rate income tax
• Flexibility on when and how to extract profit (salary vs dividend, retain in company)
• Easier to bring in investors, sell, or wind up cleanly
• Often required by larger commercial customers

Cons

• Annual accounts and CT600 to file
• Confirmation statements at Companies House
• Personal admin: dividend vouchers, board minutes, payroll if you take a salary
• Higher accountancy fees
• Information about directors and shareholders is public

Tax comparison at typical profit levels

A rough guide (numbers approximate, get personalised advice for your situation):

• Profit £20,000: sole trader usually wins — Corporation Tax + dividend tax broadly equal income tax + Class 4 NI
• Profit £50,000: close to break-even either way
• Profit £80,000+: limited company often saves tax, especially if you can leave some profit in the company

Other factors that decide it

• Liability risk: if your work could lead to lawsuits or large debts, limited company protection matters
• Customer expectations: some industries default to limited company suppliers
• Borrowing plans: mortgages and personal credit are easier as a sole trader
• Long-term plans: a limited company is easier to sell or pass on