Sole trader or limited company? A tradesperson's decision guide

A huge amount of what's written about this question boils down to "a limited company saves you tax once you're earning above £X", usually somewhere between £40,000 and £50,000 profit. That framing is common, and it isn't reliably true. It ignores how you'd actually draw money out of a limited company, ignores that a single-director company usually can't claim the Employment Allowance that would otherwise cut employer National Insurance, and it's now working against a dividend tax rise that took effect on 6 April 2026. A threshold that was roughly right in 2023 is not automatically still right today.

The honest version: staying a sole trader is simpler to set up and run in almost every practical sense. A limited company is worth a proper look once you're carrying meaningful liability exposure, a main contractor or commercial client may require it for a particular contract, or you want to work out whether the numbers, not a headline threshold, actually favour it once you account for how you'd pay yourself, any other income, and your admin costs. Working that out for your own situation is exactly the kind of thing to take to an accountant with real figures, not decide from a blog post, this one included.

A structural comparison, not a verdict. Every row below is explained in more detail further down the page.

If you're newly self-employed, still working out how steady your income is, or you simply don't yet know whether a limited company's extra admin would be repaid by anything you'd actually save, a sole trader setup is genuinely simpler, not just cheaper. There's no separate legal entity to run, no confirmation statement, no Companies House public filing, and no director's duties on top of the trade itself.

It also suits anyone who wants to keep things as low-admin as possible while they build the business up, or who values not having their accounts on public record. A sole trader who later needs to become a limited company can do that; there's no penalty for starting simple.

Liability is usually the strongest non-tax reason. If you're taking on larger jobs, employing people, or carrying meaningful risk on a contract, limited liability genuinely changes your personal exposure if something goes badly wrong, in normal circumstances (a director can still be personally liable in some situations, such as giving a personal guarantee or wrongful trading, so this isn't an absolute shield).

Commercial credibility can matter too: some main contractors or commercial clients may require a limited-company structure for a particular contract, independent of the tax question entirely.

On tax specifically, there's no profit figure where a limited company reliably starts to look attractive. It depends on your actual profit, how you'd split salary and dividends, any other income, pension contributions, how many associated companies you have (which reduces the Corporation Tax thresholds), and what you need to draw out to live on. See the worked example below: at exactly the profit level generic guides most often cite as a turning point, the numbers do not straightforwardly favour going limited once those factors are accounted for.

A sole trader pays Income Tax and Class 4 National Insurance on business profit through Self Assessment, the same way whether that profit is £20,000 or £120,000: 20% Income Tax up to £37,700 of taxable profit above the £12,570 Personal Allowance, 40% above that (45% above £125,140, where the Personal Allowance has fully tapered away), plus Class 4 NI at 6% on profit between £12,570 and £50,270 and 2% above that. Class 2 NI is treated as paid automatically once profit reaches £7,105.

A limited company pays Corporation Tax on its profit after deducting allowable costs, including any salary paid to a director, which is normally an allowable expense in the same way as any other employment cost, subject to the normal rules. The Corporation Tax rate is 19% on profits of £50,000 or less, 25% on profits above £250,000, with marginal relief tapering the rate between those two figures (these thresholds are reduced proportionally if the company has associated companies). Once Corporation Tax has been paid on what's left, that remaining amount is the company's, not yours personally, and dividends are paid out of it on top of whatever salary was already taken as an expense before Corporation Tax was worked out. Dividends carry their own £500 tax-free dividend allowance and their own rates: 10.75% basic rate, 35.75% higher rate, 39.35% additional rate for 2026/27, up from 8.75% and 33.75% the year before, following the Autumn Budget 2025 dividend rate rise.

That salary/dividend split is where the generic "£40k threshold" claims usually go wrong: they assume an optimised salary structure without mentioning that a single-director limited company, which is what most tradespeople going limited would set up, usually cannot claim the £10,500 Employment Allowance that would otherwise cut employer National Insurance on that salary. HMRC's own guidance is explicit: a limited company cannot claim it if it has just one director and that director is the only employee earning above the secondary NI threshold. That restriction alone changes the maths generic calculators built around a multi-employee business don't account for.

Take £45,000 of profit, right in the middle of the range generic guides cite as where a limited company starts to pay off.

As a sole trader: Income Tax on £32,430 of taxable profit (£45,000 minus the £12,570 Personal Allowance) at 20% is £6,486.00. Class 4 NI on the same £32,430 at 6% is £1,945.80. Total tax and NI: £8,431.80. Take-home: £36,568.20.

As a limited company, drawing the entire post-tax profit as dividends with no salary: Corporation Tax at 19% on £45,000 is £8,550.00, leaving £36,450.00. Against that, the unused £12,570 Personal Allowance and £500 dividend allowance shelter the first £13,070 from any personal tax; the remaining £23,380 is taxed at the 10.75% basic dividend rate, £2,513.35. Total tax: £11,063.35 (Corporation Tax plus dividend tax). Take-home: £33,936.65.

At this profit level, in this simplified comparison, the sole trader keeps £2,631.55 more, not less. A real limited company would normally do better than this by paying a small director's salary before taking dividends, since salary is deductible against Corporation Tax, but that salary then brings employer National Insurance into play, and (per the section above) most single-director companies can't offset that with the Employment Allowance. Getting that structuring right, and finding the profit level where it genuinely turns in the limited company's favour for your own circumstances, is precisely the calculation to take to an accountant with your real numbers.

A sole trader files one Self Assessment return a year, or quarterly updates plus a final declaration instead if Making Tax Digital for Income Tax applies to them (see TBV's MTD guide, linked below). A limited company has several separate obligations running in parallel: annual accounts filed with Companies House (first accounts within 21 months of registering, then within 9 months of each financial year end), a separate Company Tax Return filed with HMRC (within 12 months of the accounting period ending), Corporation Tax paid to HMRC 9 months and 1 day after the accounting period ends, so before the return itself is due, and a confirmation statement filed with Companies House at least once every 12 months, within 14 days of the review period ending (£50 online, £110 on paper, current from 1 February 2026).

None of this is optional once you're a director, and a director remains legally responsible for it even if they hire an accountant to handle the day-to-day work. Because of that extra filing running in parallel with a full-time trade, budgeting for an accountant or accounting software built for limited companies from day one is worth considering.

As a sole trader, you and the business are legally the same thing. If the business can't pay a debt, that's your personal debt, and personal assets are exposed to cover it.

A limited company is a separate legal entity, so in normal circumstances your liability is limited to what you've invested in the company, protecting personal assets from business debts. That protection isn't absolute: a director can still be personally liable in specific situations, such as a personal guarantee given to a lender or supplier, or wrongful/fraudulent trading. It's a real, meaningful difference, but not an unconditional shield.

CIS applies to both structures: a limited company doing construction work for a contractor registers and gets CIS deductions the same way a sole trader does, and can apply for gross payment status the same way. Where it genuinely differs is the gross payment status turnover test. A sole trader needs turnover of at least £30,000 (excluding VAT and material costs). GOV.UK's rule for a limited company is £30,000 for each director, or at least £100,000 for the whole company. There's a further close-company rule on top of that: if the company is controlled by 5 people or fewer, £30,000 turnover is needed for each of those controlling people specifically, and that group isn't automatically the same as the company's directors. Which test actually applies depends on your company's real ownership and director structure, so check the current GOV.UK gross payment status guidance against your own company rather than assuming "per director" always describes it.

For TBV's full CIS mechanics (deduction rates, verification, what changed in 2026), see the CIS guide, and use the CIS calculator to check an invoice deduction or year-end position either way; the underlying deduction rules don't depend on which structure you trade through.

Making Tax Digital for Income Tax, as TBV covers elsewhere, applies to sole traders and landlords, not to limited companies, which are outside its scope and instead file a Company Tax Return under Corporation Tax rules. Going limited doesn't bring you into MTD for Income Tax; it moves you to a different reporting regime entirely, with its own software and accountant relationship, typically a bigger step up in admin than MTD itself.

Most cloud accounting software (see TBV's Accounting & MTD comparison) supports both sole trader and limited company setups, but the plan you need, and the case for paying an accountant to run payroll and dividends properly, both tend to increase once you're a director.

• ▸Have you modelled a director's salary plus dividends against your actual profit, other income and Self Assessment position, rather than relying on a headline profit threshold?
• ▸Would a single-director company's Employment Allowance restriction change that comparison?
• ▸Do you have associated companies that would reduce your Corporation Tax thresholds?
• ▸Do you need the liability protection, because of the size of contracts you take on or risk you're carrying?
• ▸Might a client or main contractor require a limited-company structure for a particular job?
• ▸Are you comfortable with your accounts and director details being publicly searchable on Companies House?
• ▸Can you commit to the extra filing (accounts, Company Tax Return, confirmation statement) or budget for an accountant to run it?
• ▸If you do CIS work, have you checked which gross payment status turnover test you'd actually meet, including the close-company rule, under each structure?

Before you incorporate, not after. An accountant can model your actual profit against a real salary/dividend structure, check whether the Employment Allowance restriction applies to your specific setup, and factor in anything this page can't, such as other income, pension contributions, or plans to bring in a second director. The cost of that conversation is small next to the cost of restructuring later if the numbers don't work out the way a generic threshold suggested they would.