Key Differences at a Glance
Choosing between sole trader and limited company status is one of the most important decisions you'll make as a UK freelancer. Both structures are legitimate ways to operate your business, but they differ significantly in taxation, liability, and administrative requirements.
| Factor | Sole Trader | Limited Company |
|---|---|---|
| Legal status | You and your business are one entity | Separate legal entity from you |
| Setup | Register with HMRC (free) | Register with Companies House (£12-50) |
| Taxes paid | Income Tax + National Insurance | Corporation Tax + personal taxes on salary/dividends |
| Personal liability | Unlimited – personal assets at risk | Limited to company assets (with exceptions) |
| Annual filing | Self Assessment tax return | Company accounts, Confirmation Statement, personal tax returns |
| Privacy | Details not publicly available | Director details on public register |
| Accounting costs | £150-500/year | £500-2,000/year |
| Profit access | Immediate – all profits are yours | Via salary and dividends |
Tax Implications Explained
Taxation is often the primary factor in choosing between structures. The calculations can be complex, but here's how each works:
Sole Trader Taxation
As a sole trader, you pay:
- Income Tax on all profits at standard rates (20%, 40%, or 45%)
- Class 4 National Insurance – 6% on profits between £12,570 and £50,270, then 2% above that
Note: Class 2 NI was abolished in April 2024. You now receive automatic NI credits if profits exceed £6,725.
Your tax-free Personal Allowance (£12,570 for 2025/26) applies to your total income, including self-employment profits.
Limited Company Taxation
A limited company pays Corporation Tax on profits at 19% (for profits under £50,000) or up to 25% (for profits over £250,000), with marginal relief between these thresholds.
As a director, you'll typically extract money through:
- Salary – Usually set at the NI threshold (around £12,570) to minimise NI while maintaining State Pension contributions
- Dividends – Taxed at lower rates than salary (8.75% basic, 33.75% higher, 39.35% additional rate) after a £500 tax-free allowance
💡 Practical Example
Emma earns £60,000 profit. As a sole trader, she'd pay approximately £14,200 in Income Tax and National Insurance. As a limited company director, taking a £12,570 salary and the rest as dividends, she'd pay roughly £11,800 total (Corporation Tax plus personal taxes). That's a saving of around £2,400—but she'd also pay £800-1,500 more in accountancy fees, reducing the net benefit.
When Does a Limited Company Save Tax?
Generally, tax savings become meaningful when your profits exceed £50,000-60,000 annually. Below this threshold, the additional accountancy costs often outweigh the tax savings, unless you have other reasons to incorporate.
Important: Tax laws change frequently. Always consult an accountant for calculations specific to your situation and the current tax year.
Liability Differences
This is where the structures differ most fundamentally.
Sole Trader Liability
As a sole trader, you're personally liable for all business debts and legal claims. If your business owes money or faces a lawsuit, creditors can pursue your personal assets—including your home, savings, and possessions.
Limited Company Liability
A limited company is a separate legal entity. Shareholders' liability is "limited" to their investment in the company. In theory, if the company fails, your personal assets are protected.
However, limited liability has important exceptions:
- Personal guarantees – Banks often require directors to personally guarantee loans
- Wrongful trading – If you continue trading while insolvent, you can be held personally liable
- Fraud or negligence – Personal liability applies if you've acted improperly
- Professional services – Clients may still sue you personally for professional negligence
For most freelancers, professional indemnity insurance provides better protection than a limited company structure, regardless of which structure you choose.
Administration Burden
Sole Trader Administration
The simplicity is a major advantage:
- Register once with HMRC (free, online)
- Keep records of income and expenses
- File one Self Assessment tax return annually (by 31 January)
- Pay tax twice yearly (31 January and 31 July)
Limited Company Administration
Significantly more complex:
- Register with Companies House (£12 online, £50 by post)
- Maintain statutory books and registers
- File annual accounts with Companies House
- File a Confirmation Statement annually (£13)
- File a Corporation Tax return (CT600)
- Run payroll for salary payments (monthly or quarterly RTI submissions)
- File personal Self Assessment if taking dividends
- Notify Companies House of any company changes
Most limited company directors hire an accountant to manage these requirements, which adds to costs but reduces your administrative time significantly.
Cost Comparison
| Cost | Sole Trader | Limited Company |
|---|---|---|
| Setup | Free | £12-50 (Companies House) |
| Annual filing fees | None | £13 (Confirmation Statement) |
| Accountancy (typical) | £150-500/year | £500-2,000/year |
| Payroll software | Not needed | £0-200/year |
| Closing down | Notify HMRC (free) | £10-33 (strike off) or £1,000+ (liquidation) |
The main ongoing cost difference is accountancy. While a sole trader might manage their own accounts with simple software, limited company accounts require professional preparation in most cases.
When to Choose Each Structure
Choose Sole Trader When:
- You're just starting out and want to keep things simple
- Your expected profits are under £50,000-60,000
- You want to test freelancing before committing fully
- You prefer full privacy (no public register)
- You want immediate access to profits
- Your work carries low liability risk
- You plan to do this temporarily or part-time
Choose Limited Company When:
- Your profits consistently exceed £60,000
- You want to retain profits in the business for growth
- Limited liability is important for your industry
- You work with large clients who prefer contracting with limited companies
- You want to bring on business partners or investors
- You're building a business to sell eventually
- You work through IR35-relevant contracts (though this is complex—seek advice)
Decision Framework
Ask yourself these questions:
1. What's Your Expected Annual Profit?
- Under £30,000: Almost certainly sole trader
- £30,000-50,000: Sole trader usually better, but run the numbers
- £50,000-80,000: Worth calculating both options with an accountant
- Over £80,000: Limited company often beneficial, subject to IR35 status
2. How Important Is Simplicity?
If you value your time and dislike paperwork, the simplicity of sole trader status may outweigh modest tax savings from incorporation.
3. What Does Your Industry Expect?
Some industries (particularly IT contracting) often expect contractors to operate through limited companies. Others (creative fields, consulting) commonly work with sole traders.
4. What's Your Risk Profile?
If you're working on projects where mistakes could lead to significant claims, consider whether limited liability (plus insurance) provides meaningful protection.
💡 Practical Example
Tom is a copywriter expecting to earn £40,000 in his first year. He considered incorporating but realised: (1) tax savings would be minimal at this income level, (2) accountancy costs would rise by £600+/year, (3) his work carries low liability risk, and (4) he values simplicity. He registered as a sole trader and plans to review once profits exceed £60,000.
Remember: You Can Change Later
Starting as a sole trader doesn't lock you in. Many successful freelancers operate as sole traders for years before incorporating once it makes financial sense. The transition involves some paperwork but isn't complicated.
If you're unsure, start simple as a sole trader. Track your finances carefully, and revisit the decision annually. When your profits grow to where incorporating clearly saves money after accountancy costs, make the switch.