What is a sole trader?
A sole trader is the simplest business structure in the UK. You register with HMRC for Self Assessment, keep records of your income and expenses, and file a tax return each year. There is no separate legal entity — you and the business are the same thing.
It costs nothing to register, the admin is light, and you keep all the profits after tax. For many freelancers, tradespeople and small service businesses, it is the obvious starting point.
- Free to register with HMRC
- Simple accounting — one Self Assessment return a year
- You keep all profits after income tax and National Insurance
- No separate legal identity between you and the business
What is a limited company?
A limited company is a separate legal entity. You register it with Companies House, and the company — not you — owns the assets, signs the contracts and is responsible for the debts. You become a director and possibly a shareholder of the company.
This separation is the whole point: your personal assets are protected if the business fails or is sued, subject to a few exceptions such as personal guarantees on loans. The trade-off is more paperwork — a confirmation statement each year, annual accounts filed at Companies House, and a corporation tax return.
- Registered with Companies House (costs £12 online)
- The company is a separate legal entity from you
- Limited liability protects personal assets in most cases
- More filing and accounting obligations each year
Sole trader vs limited company: the key differences
Here is a side-by-side comparison of the things that actually matter when you are deciding:
Liability
As a sole trader, you are personally liable for every debt the business owes. If a supplier sues you or the business cannot pay its bills, your home, savings and other personal assets are on the line. Insurance can help, but it does not change the legal position.
As a limited company, the company's debts are the company's debts. Your personal exposure is generally limited to what you have invested in shares, plus any personal guarantees you have signed — for example on a commercial lease or a business bank loan.
Tax
Sole traders pay income tax and National Insurance on their profits, banded at the same rates as employment income. Above £50,000 of profit, the additional rate of 45p applies, and you lose the personal allowance above £100,000.
Limited companies pay corporation tax on their profits. As of 2026, the main rate is 25% for profits over £250,000 and 19% for profits under £50,000, with marginal relief in between. You then pay yourself through a combination of salary (tax-deductible for the company) and dividends (taxed at dividend rates, which are lower than income tax).
For profits above roughly £50,000–£70,000, a limited company is typically more tax-efficient. Below that, the savings are modest and may not justify the extra accounting cost. The exact crossover depends on your circumstances — this is where professional advice pays for itself.
Paperwork and admin
Sole trader admin is minimal: register for Self Assessment, keep records, file one return. You do need to register for VAT if your turnover exceeds £90,000 (2026 threshold), and you may need to register for PAYE if you employ staff.
Limited companies file a confirmation statement each year, full or abbreviated accounts with Companies House, a corporation tax return with HMRC, and maintain a register of directors and shareholders. Most limited company owners use an accountant — the complexity is real and the penalties for getting it wrong are serious.
Credibility and perception
Some larger clients, government contracts and tendering bodies prefer or require a limited company. 'Limited' on your invoices and website signals a level of permanence and structure that 'sole trader' does not always convey. It is not a reflection on you — it is just how procurement teams filter.
That said, sole traders win plenty of work, particularly in trades, consulting and creative services. If your clients are other small businesses or consumers, the structure rarely matters to them.
Which should you choose?
There is no single right answer. A reasonable starting point:
- Low profits (under £30,000–£50,000), simple service, testing the idea → start as a sole trader. You can always incorporate later.
- Higher profits, or you expect to grow and take on staff or investment → a limited company is likely the better fit.
- Significant personal risk (contracts, debt, premises, employees) → the limited liability protection is worth the extra admin.
- You want to reinvest profits back into the business rather than draw them as personal income → a limited company lets you do this more efficiently.
Who to go to for advice
This guide gives you the lay of the land, but the actual decision depends on your numbers, your existing income, your family situation and your plans. Getting it wrong can cost you thousands in tax or leave you personally exposed.
A qualified accountant can run the numbers for your specific situation and tell you — in pounds — what each structure would cost you this year and next. They can also handle the registration, set up your payroll and bookkeeping, and flag anything you have not thought about.
We have Accountancy Enterprise listed as a trusted supplier on Business Match AI in our Accountants, Tax Specialists & Financial Advisors category. They advise on exactly this kind of decision. You can view their profile and request a quote directly through the site.
Where to go next
If you are weighing up suppliers more broadly — accountants, software, telecoms — our Questions to Ask New Suppliers checklist and our guide on comparing supplier quotes will help you evaluate anyone you speak to. And if you are also thinking about accounting software, read our guide on switching accounting software so you start on the right system from day one.