Sole trader vs limited company tax

Choosing between sole trader and limited company is a tax and admin decision, not just a branding one. The right answer depends on profit level, how much you need personally, and whether you value simplicity.

Sole trader: simpler, taxed on profits

As a sole trader you report business profits on Self Assessment. You pay Income Tax and National Insurance on those profits, whether or not you draw the cash. Bookkeeping and filing are lighter, and there is no Companies House annual cycle.

That simplicity is valuable when profits are modest, or when you want minimal compliance cost while you establish the business.

Limited company: Corporation Tax, then extraction

A company pays Corporation Tax on its profits. What you take personally — salary, dividends, pension contributions — is taxed again under the personal rules. That second layer is where the comparison gets nuanced: salary attracts National Insurance; dividends do not, but they use dividend allowances and bands; pension contributions can be efficient within annual allowance limits.

Companies also mean statutory accounts, Corporation Tax returns, confirmation statements and (often) PAYE. Those costs need to sit in the same spreadsheet as any Corporation Tax saving.

Other factors beyond the rate table

• Limited liability and how you contract with clients
• Mortgage or finance applications that treat company directors differently
• IR35 / off-payroll rules if you work through a personal service company
• Future sale or bringing in co-owners

There is no universal profit threshold where “everyone should incorporate.” We compare both structures on your projected numbers before you change anything. Talk to us if you want that modelled plainly.