Guide

Sole trader or limited company: which is better for you?

Reviewed by Andy Smith, Director, Abbeygate AccountancyLast updated 16th October 2026

Quick answer

Being a sole trader is simpler and cheaper to run. A limited company protects your personal assets and can be more tax efficient once profits are steady, often somewhere above £40,000 to £50,000 a year, depending on how much you need to draw out. The right answer depends on your profit, plans and risk, so get it checked before you switch.

The key differences

	Sole trader	Limited company
Tax on profits	Income Tax and Class 4 National Insurance on all profit	Corporation Tax at 19% to 25%, then tax on what you draw as salary or dividends
Personal liability	You're personally liable for business debts	Liability is usually limited to the company
Admin	Self Assessment, and MTD if over the threshold	Annual accounts, CT600, confirmation statement, payroll
Privacy	Accounts are private	Accounts and directors are public at Companies House
Typical accountancy cost	£300 to £700 a year	£850 to £1,900 a year

How are company owners taxed in 2026/27?

Corporation Tax is 19% on profits up to £50,000, 25% over £250,000, with marginal relief in between.
Most owner-directors take a small salary and the rest as dividends.
From 6th April 2026 dividend tax rates are 10.75% for basic rate and 35.75% for higher rate taxpayers, with a £500 tax-free dividend allowance.
The personal allowance stays frozen at £12,570.

The higher dividend rates from April 2026 have narrowed the gap, which is why this decision needs proper numbers rather than a rule of thumb.

When does incorporating make sense?

Profits are steady and you don't need to draw all of them out.
You want to protect personal assets from business risk.
Customers or lenders expect to deal with a company.
You plan to bring in investors or sell the business one day.

Frequently asked questions

At what profit should I go limited?

There's no single number. Many people start to benefit somewhere above £40,000 to £50,000 of steady profit, but the 2026 dividend tax increases mean you should run your own figures.

Can I switch from sole trader to limited company later?

Yes. You can incorporate at any time. Get advice on transferring assets, goodwill and any VAT registration so the move doesn't create an unexpected tax bill.

Is a limited company more credible?

Some customers, suppliers and lenders prefer dealing with a company, especially larger businesses and public sector buyers.

What are the dividend tax rates for 2026/27?

10.75% basic rate, 35.75% higher rate and 39.35% additional rate, after the £500 dividend allowance.

Sources and further reading

This guide is general information for UK taxpayers and was correct when last reviewed. Tax rules change, so check your own position with a qualified adviser.