Sole Trader vs Limited Company
If you work for yourself, you have two main options: operate as a sole trader (self-employed) or set up a limited company. The right choice depends on your income level and personal circumstances.
Sole Trader — How It Works
As a sole trader, you and your business are legally the same entity. You pay income tax and National Insurance on your profits through Self Assessment. It's simpler but can mean more tax at higher income levels.
Sole Trader Tax (2025/26)
Income tax: Same bands as employment (20%, 40%, 45%)
Class 2 NI: £3.45/week (if profits over £12,570)
Class 4 NI: 6% on profits £12,570-£50,270, then 2%
No corporation tax, no dividend tax
Limited Company — How It Works
A limited company is a separate legal entity. The company pays corporation tax (25%) on profits. You then pay yourself a small salary and take the rest as dividends, which are taxed at lower rates than income.
Limited Company Tax Strategy
1. Pay yourself a salary of £12,570 (uses personal allowance, no tax)
2. Company pays corporation tax at 25% on remaining profits
3. Take the rest as dividends: 8.75% basic, 33.75% higher rate
4. First £500 of dividends is tax-free
When Is a Limited Company Worth It?
The general rule of thumb: a limited company starts saving you tax when your profits exceed roughly £30,000-£40,000. Below this, the additional admin costs and accountancy fees (typically £1,000-£2,000/year) eat into any tax savings.
| Annual Profit | Sole Trader Tax | Ltd Company Tax | Difference |
|---|---|---|---|
| £30,000 | ~£5,200 | ~£5,100 | ~£100 saving |
| £50,000 | ~£11,800 | ~£9,900 | ~£1,900 saving |
| £70,000 | ~£19,400 | ~£15,200 | ~£4,200 saving |
| £100,000 | ~£31,000 | ~£24,500 | ~£6,500 saving |
Advantages of Staying Sole Trader
Simpler accounting and tax returns, lower admin costs, no Companies House filing, more privacy (no public accounts), easier to start and stop, and profits below ~£35k are taxed similarly anyway.
Advantages of a Limited Company
Lower overall tax at higher profits, limited liability (personal assets protected), more professional image, easier to bring in partners or investors, and more flexibility in when you take income.
Compare the tax for your specific situation
Self-employed calculator →See also: Dividend tax calculator · IR35 calculator