It is one of the first questions new business owners ask us, and there is no answer that fits everyone. Here is how we think it through with clients.
Sole trader: simple and flexible
You and the business are the same legal person. Profits are taxed through Self Assessment with Income Tax and Class 4 National Insurance. Setting up takes minutes, the admin is light and you can take money out whenever you like. The trade-off: you are personally liable for business debts.
Limited company: separate and structured
The company is its own legal entity. It pays Corporation Tax on profits — 19% on profits up to £50,000, 25% above £250,000, with marginal relief in between. Directors usually take a mix of salary and dividends. Your personal liability is generally limited to what you invest.
What changes the decision
- Profit level: at lower profits, the tax saving from a company is often small or disappears once extra costs are counted.
- Dividend tax: from April 2026 the ordinary and upper dividend rates rose to 10.75% and 35.75%, which narrows the gap for some owners.
- Risk: if you sign leases, employ staff or take on large contracts, limited liability matters more.
- Clients: some larger customers prefer or require working with a company.
- Admin: companies file annual accounts and a confirmation statement at Companies House, a Corporation Tax return and usually run payroll. Directors also need to verify their identity with Companies House.
A practical approach
Many owners start as sole traders and incorporate once profits are steady and they don’t need all the money they make. The right moment is a numbers question, not a feeling.
How we help
We model your likely profit under both structures, include every cost and compare the money you would keep. If a company makes sense, we form it, register it for tax and set up payroll.
This article is general guidance based on the rules for the 2026/27 tax year. It isn’t personal advice — talk to us before you act on it.
