28 Jan Sole Trader Vs Limited Company: Which Is Better For Your Tax Bill?
If you're running your own business: or thinking about starting one: you've probably asked yourself this question at least once. Maybe twice. Perhaps it keeps you up at night.
Sole trader or limited company? Which one saves you more money?
The honest answer is: it depends. But don't worry: that's not a cop-out. By the time you've finished reading this, you'll have a much clearer picture of which structure might work best for your specific situation. And if you're still unsure? That's exactly what we're here for.
What's the Actual Difference?
Before we dive into the tax stuff, let's clear up the basics.
Sole trader means you and your business are legally the same thing. You keep all your profits (after tax), but you're also personally responsible for any debts. Setting up is simple: you just register with HMRC and off you go.
Limited company means your business is a separate legal entity. It has its own finances, pays its own taxes, and: crucially: your personal assets are protected if things go wrong. You become a director (and usually a shareholder), and you pay yourself through a combination of salary and dividends.
Both structures have their place. The right choice depends on how much you're earning, your appetite for admin, and your plans for the future.
How Tax Works as a Sole Trader
As a sole trader, things are relatively straightforward. You pay Income Tax on your profits and National Insurance contributions on top.
Here's how it breaks down for the 2025/26 tax year:
- Personal Allowance: £12,570 (you pay no tax on this)
- Basic rate: 20% on profits between £12,570 and £50,270
- Higher rate: 40% on profits between £50,271 and £125,140
- Additional rate: 45% on anything above £125,140
On top of that, you'll pay Class 4 National Insurance:
- 6% on profits between £12,570 and £50,270
- 2% on profits above £50,270
So if you're earning £40,000 profit, you're looking at roughly 26% in combined tax and NI on most of your earnings. Not too shabby.
The big advantage here is simplicity. You don't need to file company accounts, deal with Companies House, or worry about extracting money from the business. Your profit is your money: simple as that.
If you're looking for a sole trader accountant to help you stay on top of Self Assessment, we've got you covered.
How Tax Works for a Limited Company
Limited companies work differently. The company pays Corporation Tax on its profits, and then you pay personal tax on whatever you take out.
Current Corporation Tax rates:
- 19% on profits under £50,000
- 25% on profits over £250,000
- A sliding scale for profits in between
Here's where it gets clever. As a director, you can choose how you take money out of the company. Most people opt for a combination of:
- A small salary (usually around £12,570 to use your personal allowance without triggering NI)
- Dividends from company profits
Dividends are taxed at lower rates than salary:
- 8.75% at basic rate
- 33.75% at higher rate
- 39.35% at additional rate
This salary-plus-dividends approach is often more tax-efficient than taking everything as salary: or earning the same amount as a sole trader.
So When Is Being a Sole Trader Better?
If your profits are under £50,000, staying as a sole trader often makes more sense.
Why? Because at lower income levels, the tax savings from a limited company simply aren't enough to justify the extra hassle and costs. You've got:
- Annual accounts to file with Companies House
- Corporation Tax returns
- Higher accountancy fees
- More complex record-keeping
For someone earning £30,000 profit, the difference in tax between the two structures might only be a few hundred pounds: which gets eaten up by the additional admin costs anyway.
Plus, as a sole trader, you can claim the £1,000 trading allowance, and you benefit from the personal allowance straight away. A limited company doesn't get a personal allowance: it pays Corporation Tax from the very first pound of profit.
The bottom line? If you're keeping things small and simple, sole trader status often wins.
When Does a Limited Company Make More Sense?
Once your profits climb above £50,000, the picture changes significantly.
At this level, a sole trader starts paying 40% Income Tax on everything above £50,270, plus 2% National Insurance. That's 42% of your hard-earned money going to HMRC.
A limited company, on the other hand, gives you options. You can:
- Pay yourself a tax-efficient salary
- Take dividends at lower rates
- Leave profits in the company if you don't need them right now
- Time your withdrawals to stay in lower tax brackets
This flexibility can save thousands of pounds each year. And if your profits are well into six figures, the savings become even more pronounced.
There's also the liability protection to consider. As a limited company director, your personal assets (your house, savings, car) are generally protected if the business runs into trouble. That peace of mind is worth something.
If you're thinking about making the switch, our limited company accountant service can help you through every step of the process.
Beyond Tax: What Else Should You Consider?
Tax isn't everything. Here are a few other factors worth thinking about:
Administration
Limited companies mean more paperwork. You'll need to file confirmation statements, maintain statutory records, and keep your company details up to date. If admin gives you a headache, this is worth factoring in.
Making Tax Digital (MTD)
From April 2026, MTD for Income Tax kicks in for sole traders earning over £50,000. This means quarterly digital reporting: and potentially higher accountancy fees. The gap between sole trader and limited company admin costs is narrowing.
As a Xero Platinum partner, we can help you get set up with cloud accounting that makes MTD compliance painless. Whether you're a sole trader or limited company, having the right Xero accountant in your corner makes all the difference.
Mortgages and Lending
Some mortgage lenders prefer sole traders because your income is more straightforward to evidence. With a limited company, you might need to show both your salary and dividend income: or even provide company accounts. It's not a dealbreaker, but it's worth knowing.
Future Plans
Thinking about taking on investors or selling the business one day? A limited company structure makes this much easier. Sole traders can't sell shares or bring in equity partners in the same way.
How Do You Decide?
Here's a quick framework:
Stay as a sole trader if:
- Your profits are under £50,000
- You value simplicity over small tax savings
- You don't need liability protection
- You're testing a business idea before committing long-term
Consider a limited company if:
- Your profits exceed £50,000 (or will soon)
- You want to protect personal assets
- You'd benefit from flexible profit extraction
- You're planning for growth, investment, or eventual sale
Of course, everyone's situation is different. Your family circumstances, other income sources, and long-term goals all play a part.
We're Here to Help You Figure It Out
At Harrison's Accountancy, we help business owners make this decision every week. We won't push you towards one structure or the other: we'll look at your actual numbers, understand your goals, and give you honest, personalised advice.
And if you do decide to incorporate? We'll handle the transition smoothly, set you up on Xero, and make sure you're paying yourself in the most tax-efficient way possible.
No jargon. No judgment. Just practical help from people who genuinely care about getting it right for you.
Ready to have a chat about what's best for your situation? Get in touch( we'd love to hear from you.)
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