Sole Trader vs Limited Company

As a sole trader, you and the business are the same legal person. You pay income tax and Class 4 National Insurance on your profits through Self Assessment:

• Income tax: 20% / 40% / 45% above the £12,570 personal allowance.
• Class 4 NI: 6% on profits between £12,570 and £50,270, then 2% above.
• Class 2 NI is now voluntary for most, but still builds your State Pension record.

It's simple to run, no Companies House filing, no corporation tax, and your money is your own.

A limited company is a separate legal entity. The typical tax-efficient owner-director takes a small salary up to the personal allowance and draws the rest of the profit as dividends:

• The company pays corporation tax (19%, 25%) on its profits.
• A modest director's salary is usually set at £12,570 to use the personal allowance.
• Remaining post-tax profit is paid as dividends, taxed at 8.75% / 33.75% / 39.35% after the £500 dividend allowance.

At £60,000 annual profit, the sole trader pays income tax and Class 4 NI on the lot, while the limited company splits a £12,570 salary and dividends, paying corporation tax first then dividend tax. In most cases at this level the limited company leaves a few thousand pounds more in your pocket, but that gap narrows once you factor in accountancy fees (often £1,000 to £2,000 a year) and the extra admin.

Tax is one input. Also weigh:

• Limited liability: a company protects your personal assets if the business fails.
• Credibility: some clients prefer to contract with a limited company.
• Admin: annual accounts, a confirmation statement, corporation tax returns and payroll all add work.
• Privacy: company accounts and director details are public at Companies House.
• Retained profit: a company lets you leave profit in the business and draw it later, smoothing your tax.

• Incorporating too early. At low profits the tax saving is small and easily wiped out by accountancy fees and admin.
• Drawing dividends with no profit. Dividends can only be paid from retained post-tax profit, illegal dividends can be reclaimed by HMRC or a liquidator.
• Forgetting the salary triggers employer NI. A director salary above £5,000 now attracts 15% employer NI, slightly denting the limited-company advantage.
• Ignoring the bigger picture. Liability, IR35, pensions and mortgage applications can matter more than a small tax saving.

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