Sole Trader vs Limited Company — Which Is Better in 2025/26?

One of the most common questions we hear from new self-employed clients: should I trade as a sole trader or set up a limited company? The honest answer is that it depends — on your income, your plans, and your appetite for paperwork.

This guide runs through the key differences so you can make an informed decision for the 2025/26 tax year. Tax laws can change, and individual circumstances vary, so always take professional advice for your specific situation.

What Is a Sole Trader?

A sole trader is the simplest business structure in the UK. You register as self-employed with HMRC, submit a Self Assessment tax return each year, and pay Income Tax and National Insurance on your profits.

There is no legal separation between you and your business. Your personal assets — your home, your savings — are technically at risk if the business incurs debts or faces legal action.

What Is a Limited Company?

A limited company (usually a private limited company, or Ltd) is a separate legal entity. The company has its own finances, pays Corporation Tax on its profits, and you are a director and shareholder rather than a sole trader.

Most owner-managed limited companies pay the director a salary (through PAYE) and extract further profits as dividends. This combination is typically more tax-efficient at higher income levels — though the gap has narrowed in recent years.

Key Differences at a Glance

Feature	Sole Trader	Limited Company
Setup	Register self-employed with HMRC	Incorporate at Companies House (£50 online)
Annual filing	Self Assessment tax return	Company accounts + Corporation Tax return + Confirmation Statement
Tax on profits	Income Tax (20%/40%/45%) + Class 4 NI	Corporation Tax 19% (small profits) + personal tax on salary/dividends
Legal liability	Personal liability	Limited liability (separate legal entity)
Privacy	No public filing	Accounts filed at Companies House (public record)
Ongoing admin	Low	Moderate to high
Accountancy cost	Lower (simpler accounts)	Higher (payroll, accounts, CT return)
MTD impact	Quarterly filing from April 2026 if income >£50k	Corporation Tax accounts annually (MTD not yet required for Ltd)

How Are Sole Traders Taxed in 2025/26?

As a sole trader, your profits are added to any other income you have and taxed at the following rates:

Taxable income	Income Tax rate
Up to £12,570	0% (Personal Allowance)
£12,571 to £50,270	20% (Basic rate)
£50,271 to £125,140	40% (Higher rate)
Over £125,140	45% (Additional rate)

You also pay Class 4 National Insurance on your profits:

• 6% on profits between £12,570 and £50,270
• 2% on profits above £50,270

From April 2026, sole traders and landlords with income above £50,000 must also comply with Making Tax Digital (MTD), submitting quarterly updates to HMRC digitally. This adds an administrative obligation that a limited company currently avoids.

How Are Limited Companies Taxed in 2025/26?

A limited company pays Corporation Tax on its profits:

Company profits	Corporation Tax rate
Up to £50,000	19% (Small profits rate)
£50,001 to £250,000	Marginal rate (between 19% and 25%)
Over £250,000	25% (Main rate)

After Corporation Tax, the remaining profit belongs to the company. You then pay yourself as a director using two methods:

• Salary — processed through PAYE, subject to Income Tax and National Insurance
• Dividends — distributions from company profits, taxed at lower dividend rates

The dividend allowance for 2025/26 is £500 (reduced from £1,000 in 2024/25). Dividends above this are taxed at:

Taxpayer band	Dividend tax rate
Basic rate taxpayer	8.75%
Higher rate taxpayer	33.75%
Additional rate taxpayer	39.35%

Which Structure Saves More Tax?

The answer depends heavily on your profit level and what you actually need to draw from the business.

At Lower Profit Levels (under ~£30,000)

At lower income levels, a sole trader structure is often simpler and more cost-effective. The Corporation Tax saving does not outweigh the additional costs of running a company — accountancy fees for a limited company typically run £500 to £1,500 more per year than for an equivalent sole trader.

If your profits are below £30,000, you are unlikely to see a significant net tax saving from incorporating, once you factor in those extra costs.

At Higher Profit Levels (£35,000 to £80,000)

This is where a limited company starts to become more attractive. A director can draw a salary up to the personal allowance (£12,570) to minimise tax on the salary, then take further profits as dividends at 8.75% rather than paying Income Tax at 20% plus Class 4 NI.

At Very High Profit Levels (over £100,000)

At higher incomes, the picture becomes more complex. The personal allowance is gradually withdrawn between £100,000 and £125,140, creating an effective 60% marginal tax rate in that band. A limited company with retained profits can be used to smooth income across years, potentially mitigating this.

Other Reasons to Choose a Limited Company

Tax is not the only consideration. There are several non-tax reasons people incorporate:

• Limited liability — your personal assets are protected if the business faces claims or debts
• Professional perception — some clients, particularly larger businesses and public sector bodies, prefer to contract with limited companies
• Investment and growth — limited companies are easier to take on investors or bring in shareholders
• Pension planning — limited companies can make employer pension contributions directly, reducing Corporation Tax with no personal tax charge
• IR35 and contracting — many contractors work through a limited company (though IR35 rules apply for off-payroll working)

Reasons to Stay as a Sole Trader

• Simplicity — less admin, lower accountancy costs, straightforward Self Assessment
• Flexibility — easier to wind down if circumstances change
• Lower overheads — no need for a separate business bank account (though recommended), no payroll, no Companies House filings
• Privacy — sole trader accounts are not public; limited company accounts are filed at Companies House
• MTD applies later — if your income is under £50,000, you are not in the first wave of MTD and have time to prepare

The Decision Checklist

Ask yourself these questions to help decide:

• Is my annual profit consistently above £35,000? (If yes, a limited company is worth exploring)
• Do I need limited liability protection? (If yes, incorporation makes sense regardless of tax)
• Am I comfortable with more admin and higher accountancy fees?
• Do any of my clients require me to be a limited company?
• Am I planning to grow, take on staff, or bring in investors?
• Do I have significant retained profits I do not need to draw out this year?

A Note on Timing

You can incorporate at any point, but it is worth timing the switch carefully — ideally at the start of a new tax year or accounting period. Transferring an existing sole trader business to a company midyear creates two accounting periods and extra complexity.

If you are currently a sole trader and considering incorporating for April 2026, now is the right time to take advice so you can plan the transition properly.

All figures are based on 2025/26 tax rates. Tax laws may change. This article is for general information only and does not constitute personal tax advice. Individual circumstances vary — please consult a qualified accountant before making any structural decision.