This guide has been expanded. We've published a much more detailed 2026/27 cornerstone guide with worked tax examples at £30k, £60k and £100k profit, hidden costs analysis, a section on landlord incorporation, and a clear decision framework. Read the full 2026/27 guide →
Choosing between operating as a sole trader or setting up a limited company is one of the most consequential structural decisions you'll make in business. Get it right and you save tax, protect yourself from liability, and set up the right foundations for growth. Get it wrong and you can spend years either overpaying tax or paying for extra admin you didn't need.
The short version
Below roughly £30,000 of annual profit, sole trader is almost always simpler and cheaper once running costs of a limited company are factored in. Between £40,000 and £70,000, the decision becomes nuanced and depends heavily on whether you can retain profit in the company, your appetite for admin, and non-tax factors like liability protection. Above £70,000 the structural case for incorporating becomes stronger, though the direct tax saving may be smaller than you'd expect if you're extracting all profit each year.
What makes the new guide different
The original version of this post (which you can read below) gave a high-level overview. Our new 2026/27 cornerstone guide goes much deeper:
- Full side-by-side 2026/27 tax tables for sole trader and limited company
- Worked tax calculations at £30,000, £60,000 and £100,000 profit — with actual numbers, not just generalisations
- Hidden costs nobody mentions: BADR loss, mortgage friction, public accounts, disincorporation difficulty
- Non-tax reasons to incorporate (or not)
- A dedicated section on landlord incorporation and Section 24
- A clear step-by-step decision framework
- 8 detailed FAQs covering the questions clients actually ask
The original overview (still useful)
What is a sole trader?
As a sole trader, you and your business are legally the same entity. You keep all profits after tax, but you're personally liable for any debts. You register with HMRC and file a Self Assessment tax return each year. From April 2026, you'll also be brought into Making Tax Digital for Income Tax if your qualifying income exceeds £50,000 — see our MTD landlord guide.
What is a limited company?
A limited company is a separate legal entity. It pays Corporation Tax on profits (19% on the first £50,000, with marginal relief above that), and as a director you pay yourself through a combination of salary and dividends. The split is where most of the tax planning lives.
Key differences
- Tax: Sole traders pay Income Tax (20%/40%/45%) and Class 4 NIC (6%/2%) on all profits. Limited companies pay Corporation Tax (19%/marginal/25%) and directors take dividends taxed at 8.75%/33.75%/39.35%.
- Liability: Sole traders have unlimited personal liability. Limited companies provide a legal shield, though that shield is weaker than people often assume — directors are still personally liable for fraud, wrongful trading, and many personal guarantees.
- Admin: Sole traders file one Self Assessment a year (plus quarterly MTD updates from April 2026 if over the threshold). Limited companies file annual accounts at Companies House, a corporation tax return, a confirmation statement, payroll filings, and the director's personal Self Assessment.
- Privacy: Sole trader finances are essentially private. Limited company accounts are publicly viewable at Companies House — even abbreviated micro-entity accounts disclose total assets and capital.
Need personalised advice?
The right decision is genuinely individual. Book a free 20-minute call — we'll look at your actual numbers, your situation and your plans, and tell you honestly whether incorporating makes sense for you.