Sole Trader vs Limited Company: Which Is Better in 2026/27?

If you’re starting a business in the UK, you’ll usually choose between two structures: working as a sole trader or setting up a limited company. The right choice affects how much tax you pay, how much admin you do and whether your personal assets are at risk if things go wrong.

This guide compares sole trader vs limited company using the current 2026/27 tax rates from GOV.UK, so you can see the real differences in tax, liability, cost and paperwork.

Quick answer

• Sole trader suits most people starting out: it’s free, quick and simple, and you can switch later.
• Limited company suits businesses with higher profits, real liability risk, investors or clients that prefer to work with companies, as long as you’re happy with more admin and accountancy costs.

Sole trader vs limited company: comparison table

	Sole trader	Limited company
Legal status	You and the business are the same	Separate legal entity from its owners
Liability	Unlimited: you’re personally responsible for business debts	Limited: shareholders’ liability is generally limited to their investment
Setting up	Register for Self Assessment with HMRC	Register with Companies House before trading
Cost to set up	Free	£100 online Companies House fee
Tax on profits	Income Tax + Class 4 National Insurance	Corporation Tax (19%–25%), then tax on salary or dividends you take
Annual admin	Self Assessment tax return	Annual accounts, confirmation statement, Corporation Tax return, payroll if you pay a salary, plus your own tax return
Privacy	Details not on a public register	Company and director details are public on Companies House
Accountant	Optional for simple businesses	Usually recommended

Sources: GOV.UK: Set up a business, Register your company.

How sole traders are taxed (2026/27)

As a sole trader, your business profit is added to any other income and taxed through Self Assessment.

Income Tax (England, Wales and Northern Ireland)

Taxable income	Rate
Up to £12,570 (Personal Allowance)	0%
£12,571–£50,270	20%
£50,271–£125,140	40%
Over £125,140	45%

The Personal Allowance falls by £1 for every £2 of income over £100,000. Scotland has different Income Tax bands. Source: GOV.UK Income Tax rates.

National Insurance

• Class 4: 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270.
• Class 2: if your profits are £7,105 or more, Class 2 contributions are treated as paid, so you get the National Insurance credit without paying. Below that, you can choose to pay voluntary contributions of £3.65 a week.

Source: GOV.UK self-employed National Insurance rates.

Example: a sole trader with £50,000 profit

Assuming no other income and the standard Personal Allowance (2026/27, England):

• Income Tax: (£50,000 − £12,570) × 20% = £7,486
• Class 4 NI: (£50,000 − £12,570) × 6% = £2,245.80
• Total: about £9,732, leaving roughly £40,268 after tax and NI

How limited companies are taxed

Corporation Tax

Company profit	Rate
£50,000 or less	19% (small profits rate)
£50,001–£250,000	Main rate with Marginal Relief (effective rate between 19% and 25%)
Over £250,000	25% (main rate)

Source: GOV.UK Corporation Tax rates. The thresholds are reduced if you have associated companies or a short accounting period.

Taking money out: salary and dividends

The company’s money isn’t yours until you take it out. Most owner-directors take a small salary through payroll and the rest as dividends from profits after Corporation Tax.

Dividend tax 2026/27	Rate
Dividend allowance	First £500 tax-free
Basic rate	10.75%
Higher rate	35.75%
Additional rate	39.35%

Source: GOV.UK Tax on dividends. Dividend rates rose from April 2026, which has narrowed the tax advantage of a limited company for many small businesses.

Is a limited company more tax-efficient?

Sometimes, but less often than it used to be. A company can be more tax-efficient when:

• Profits are high, especially above the higher-rate threshold
• You don’t need to take all the profit out each year (money left in the company is only subject to Corporation Tax)
• You want to pay into a pension through the company

For lower profits, the savings can be small or wiped out by accountancy fees and extra admin. Because salary, employer National Insurance, dividends and pensions interact, get an accountant to run the numbers for your situation before switching.

Liability and risk

As a sole trader, you’re personally responsible for all business debts, according to GOV.UK. A limited company keeps business debts separate, but banks often ask directors for personal guarantees on loans, and directors can still be personally liable for wrongful trading or breaches of their duties. Insurance (public liability, professional indemnity) matters with either structure.

Admin and deadlines

Sole trader

• Register for Self Assessment if your self-employed income is over £1,000 in a tax year (the trading allowance).
• Register by 5 October after the end of the tax year you started trading, or you could get a penalty (GOV.UK).
• File an online tax return and pay by 31 January.
• Making Tax Digital for Income Tax: sole traders and landlords with qualifying income over £50,000 must use it from 6 April 2026, over £30,000 from April 2027 and over £20,000 from April 2028 (GOV.UK). This means keeping digital records and sending quarterly updates.

Limited company

• Register with Companies House before trading (£100 online, usually within 24 hours). Every director needs to verify their identity and get a Companies House personal code.
• File annual accounts with Companies House and HMRC, and a Company Tax Return.
• File a confirmation statement every year.
• Run payroll if you pay salaries, including your own.
• File your personal Self Assessment return if you take dividends above your allowances.

Which should you choose?

Choose sole trader if…	Choose limited company if…
You’re just starting or testing an idea	Your profits are consistently high
Your profits are modest	Your work carries real liability risk
You want the least admin and cost	Clients or contracts require a company
You value privacy	You plan to raise investment or bring in partners

Many people start as sole traders and incorporate later once profits grow. Starting a hands-on service business? See how to start a cleaning business and how to start a lawn care business, both with UK sections. Setting up in the US instead? Read LLC vs sole proprietorship.

Expenses you can claim as a sole trader

You pay tax on profit, not turnover, so claiming allowable expenses is one of the easiest ways to reduce your bill. According to GOV.UK, these include:

• Office costs such as stationery and phone bills
• Travel costs such as fuel, parking and train fares
• Clothing such as uniforms (not everyday clothes)
• Staff and subcontractor costs
• Stock and raw materials
• Financial costs such as insurance and bank charges
• Business premises costs
• Advertising and marketing
• Professional subscriptions and business training

You can use flat-rate simplified expenses for vehicles and working from home. Or, if your costs are low, claim the £1,000 trading allowance instead of actual expenses (you can’t do both).

VAT: the same rules for both

Whether you’re a sole trader or a limited company, you must register for VAT if your taxable turnover in the last 12 months goes over £90,000, or you expect it to in the next 30 days (GOV.UK). You can register voluntarily below that, which can help if most of your customers are VAT-registered businesses.

Which is better for common business types?

Business	Often starts as	Why
Cleaner, gardener, dog walker	Sole trader	Simple, low admin; insurance covers most risks
Freelance designer or writer	Sole trader	Low costs; switch later if profits grow
IT contractor	Limited company	Many agencies and clients prefer to contract with companies (IR35 rules apply)
Online shop with stock	Either	Company if you hold significant stock or take on debt
Business seeking investment	Limited company	Investors buy shares, which needs a company

6 mistakes to avoid

1. Registering late: miss the 5 October deadline and you could face a penalty.
2. Not saving for tax: put aside a percentage of every payment for Income Tax and National Insurance.
3. Forgetting payments on account: once your tax bill is over £1,000, HMRC usually asks for advance payments towards next year’s bill.
4. Treating company money as your own: in a limited company, taking money without recording it as salary, dividends or a director’s loan can create tax problems.
5. Incorporating too early for small savings that don’t cover the extra accountancy costs.
6. Ignoring Making Tax Digital: check if and when you need digital records and quarterly updates.

Frequently asked questions

Do I pay less tax as a limited company?

Not always. Companies pay 19%–25% Corporation Tax, and you then pay tax on salary or dividends you take out. With dividend tax rates rising from April 2026, the savings for small profits are often modest once accountancy costs are included.

Can I switch from sole trader to limited company?

Yes. You register a company with Companies House, move the business into it, and tell HMRC you’ve stopped trading as a sole trader. Get advice on transferring assets and contracts.

How much does it cost to set up a limited company?

The Companies House online registration fee is £100. Ongoing costs usually include accountancy fees and the annual confirmation statement fee.

When do I need to register as a sole trader?

When your self-employed income is more than £1,000 in a tax year. You must tell HMRC by 5 October after the end of that tax year.

This article is general information based on GOV.UK guidance for 2026/27, not tax advice. Rules differ in Scotland. Speak to an accountant before choosing a structure.

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