If you’re running a small business or thinking about starting one, you’ve probably asked yourself this classic question:
Should I be a sole trader or set up a limited company?

It might seem like a simple tax question, but there’s much more to it. A client recently asked me this after watching a video I shared on how a £6,000 holiday could end up costing £16,000, depending on how you take income from your business.

So let’s unpack this: What’s the real difference between a sole trader and a limited company in the UK, and which one makes the most sense for you?

The Quick Overview

• Sole Trader: Easier to set up, less admin, but more personal risk and higher tax once your income grows.
• Limited Company: More complex setup and reporting, but potentially lower tax, better protection, and more professional credibility.

Why Less Tax Isn’t Always the Best Goal

Before we dive into the numbers, let’s clear something up: Paying less tax is great, but it shouldn’t be your only goal.
There are times when paying a bit more tax makes sense for your long-term financial health and peace of mind.

Admin and Simplicity

• Sole Trader: Easier and quicker to get going. You just need to file a personal tax return.
• Limited Company: You’ll need to file annual accounts, corporation tax returns, and keep proper records — this usually means hiring an accountant.

Professional Image

Operating as “Your Name Ltd” looks more credible to potential clients and suppliers than just “Jane Smith, sole trader.” Some bigger businesses and insurers will only work with limited companies.

Personal Liability

This is one of the biggest differences.

• As a sole trader, you are the business. If something goes wrong, you’re personally liable for debts.
• With a limited company, your personal assets are protected (in most cases). The company is a separate legal entity.

In tough economic times — with businesses failing and clients paying late — this protection is more important than ever.

Getting Investment

It’s much easier to raise money as a company. You can offer shares to investors. As a sole trader, that’s not possible.

The Tax Side of Things

For Sole Traders:

• You pay Income Tax and Class 4 National Insurance on all profits, even if you leave some money in the business.
• Once your income crosses certain thresholds (e.g. £50k), you’ll enter the 40% tax band + National Insurance.
• You may also be hit with Payments on Account, where you pre-pay part of next year’s tax in advance. This can create cash flow pressure, especially for growing businesses.

For Limited Companies:

• The company pays Corporation Tax (currently around 19–25%) on profits.
• You only pay personal tax (like dividend tax) when you actually take money out.
• You can leave profits in the business to reinvest or withdraw later when your personal tax rate is lower.
• There’s also more flexibility with pensions and investments — like putting money into a director’s pension to reduce tax or loaning money to a property company.

Flexibility and Planning

With a company, you have more tools to control how and when you take income, which can lead to significant long-term savings — not just in tax, but also in opportunities (like investing more into property or pensions).

As a sole trader, you don’t have this level of control. You’re taxed on all profit, whether or not you need the money.

A Quick Tax Comparison (Assuming All Profits Are Withdrawn)

Let’s say you earn £80,000 a year:

• As a sole trader, you could lose up to 40%+ in tax and NI.
• As a limited company, if structured well, you might pay much less depending on how much you withdraw and how.

But — and this is key — if you don’t withdraw everything, your company tax bill can be even more efficient.

So, Should You Be a Sole Trader or Limited Company?

It depends.

Some people just starting out might be better off as sole traders to keep things simple. But once your income grows or your business becomes more serious, setting up a limited company is often the better move — not just for tax savings, but for protection, credibility, and future planning.

This choice isn’t just about tax — it’s about building a business that works for you.

That’s why it’s so important to speak with an advisor before making the jump.

If you’re not sure which structure fits your situation best, or you want to make the most of your current setup, we’re here to help.

👉 [Book a free consultation here] and let’s chat about what’s right for you.