Sole trader vs Ltd company — which structure is right for you?

The two most common structures for UK self-employed people are sole trader and Ltd company. Each has clear trade-offs. The right answer depends on how much you earn, how complex you want your admin to be, and how exposed you are to liability.

Sole trader — the simple option

Pros:

• One tax return per year (Self Assessment). No company filings.
• No corporation tax, no separate company bank account required.
• Cheap to set up — register with HMRC and you'll get a UTR within about 10 working days. Below the £1,000 trading allowance you don't need to register at all.
• Profits are yours immediately — no need to declare dividends.

Cons:

• You're personally liable for business debts.
• All profits taxed at income-tax rates (plus Class 4 NI) — no salary/dividend efficiency.
• Payments on account catch first-timers off guard — the January after your first tax year you pay 150% of your bill in one hit.

Ltd company — the tax-efficient option

Pros:

• Salary/dividend split: small salary up to the personal allowance, dividends for the rest. Significantly lower effective tax rate at higher profits.
• Limited liability — your personal assets are protected (subject to director duties).
• More credible to some clients, especially in tech and consulting.
• Pension contributions can be made by the company as a deductible expense.

Cons:

• More admin: Companies House filings, annual accounts, corporation tax return, payroll for your director's salary.
• Accountancy costs typically £80–£200/month.
• Profits aren't yours immediately — you take them via salary or dividends, and dividends require enough distributable profit. Borrowing from the company via a director's loan is possible but comes with tax consequences.
• Subject to IR35 rules if you're a contractor — the tax efficiency disappears inside IR35.

Where's the break-even?

As a rough rule of thumb, the financial advantage of incorporating becomes clear above £40-50k of profit, and meaningful above £80k. Below that, the extra accountancy costs and admin often eat the tax saving.

The exact break-even moves each tax year as rates change. The 2024 cuts to NI and Class 4, plus the rise in the main Corporation Tax rate to 25%, narrowed the gap somewhat. The 2025-26 employer NI hike narrowed it further.

Other factors

• Liability. If you're doing work where mistakes could cost a lot (engineering, medical, legal), Ltd company protection is worth real money.
• Investment. A Ltd company can hold retained profits, which has tax planning advantages.
• Borrowing. Mortgage applications can be more complex for Ltd directors — lenders sometimes only count salary, not dividends, depending on history.

Both — try the numbers

Don't decide on principle. Run both calculators with your actual numbers and compare the take-home figures side by side. Then add the cost of accountancy (~£1,500/year for Ltd) to the Ltd take-home column to see the real difference.