Sole Trader or Limited Company?
Find Out What’s Best for You
Starting a business or growing one comes with a big early decision:
Should you trade as a Sole Trader or set up a Limited Company?
Each structure has its own benefits, drawbacks, tax rules and legal responsibilities.
This page breaks everything down in plain English, so you can choose the option that suits you, your business, and your future plans.
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And if you want an instant recommendation based on your situation, you can take our quick test below.
What is a Sole Trader?
A sole trader is the simplest way to run a business in the UK.
You are the business. Anything you earn is counted as your personal income, and you pay tax through a Self Assessment tax return.
There’s very little paperwork, and it’s perfect for people just starting out or wanting low admin.
Pros of being a Sole Trader
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Easy and quick to set up
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Fewer reporting requirements
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Total control over the business
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Minimal paperwork
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Simple accounting
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Great for testing an idea or starting small
Cons of being a Sole Trader
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You are personally responsible for all debts (no protection)
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Tax can be higher once profits increase
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Harder to bring in partners or investors
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Some clients prefer working with limited companies
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Simple accounting
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Less professional perception for some industries
What is a Limited Company?
A Limited Company is a separate legal entity from you.
You become a director and/or shareholder, and the company has its own bank account, assets, income and tax rules.
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This structure gives you more protection and can be more tax-efficient at higher profit levels.
Pros of a Limited Company
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Limited liability — your personal assets are protected
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Often more tax-efficient as profits rise
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Easier to scale and bring on staff or partners
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More professional in many industries
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Potential to pay yourself through dividends (usually tax-efficient)
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Better opportunities for investment
Cons of a Limited Company
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More admin and legal responsibilities
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Annual accounts, Corporation Tax return, Confirmation Statement, payroll, etc.
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Must follow company law and directors’ duties
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Some clients prefer working with limited companies
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Can feel overwhelming without an accountant
Sole Trader vs Limited Company — Tax Explained Simply
Tax differences are one of the biggest factors when deciding which structure is right for you. Here’s the breakdown in plain English:
How Sole Traders Pay Tax
As a sole trader, all profits are treated as personal income.
You pay:
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Income Tax (based on brackets)
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Class 2 National Insurance
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Class 4 National Insurance
You report all of this once a year through your Self Assessment tax return.
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When Sole Trader tax is usually cheaper:
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When your profits are under £30,000
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When your business is small, simple, or part-time
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When you don’t employ staff
How Limited Companies Pay Tax
A limited company pays:
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Corporation Tax on company profits
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Directors are paid a salary (optional)
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Shareholders receive dividends (usually at a lower tax rate)
This often results in lower overall tax when profits rise.
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When Limited Company tax is usually more efficient:
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When profits are £30,000–£50,000+
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When you want to split income (salary + dividends)
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When you want to reinvest profits
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When you want to reduce personal tax exposure
Liability — Protecting Yourself
Sole Trader
You are personally responsible for everything.
If something goes wrong, debt collectors can come after you personally, including assets like your car or savings.
Limited Company
Your personal risk is limited to your shares.
Your house, car and personal savings are normally protected.
This is a major reason many people switch from Sole Trader to Limited when they start to grow.
What’s Best for You?
Choose Sole Trader if:
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You want the simplest structure
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You’re just starting out
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Your profits are under £30,000
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You want low admin
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You’re doing a side business or testing the market
Choose Limited Company if:
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Your profits are above £30,000
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You want to reduce your tax bill
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You want protection for your personal assets
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You want to hire staff or scale
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You want a more professional image
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You want more flexibility in how you pay yourself
Need Personal Advice? Get a Free Consultation
Every business is different.
If you want personalised guidance on what’s best for your situation, we can help.
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