Sole trader vs limited company: which should you choose? (2026)
The quick answer: at lower income, sole trader is simpler and often leaves more in your pocket. As profits rise, a limited company can save tax — but it adds cost and admin. The crossover is lower than people think, but it isn’t £0.
The three things that actually matter
1. Tax
A sole trader pays Income Tax and Class 4 National Insurance on all profit. A limited company pays Corporation Tax, and you extract money as a small salary plus dividends, which can be more efficient at higher profits. But once you add accountancy costs and dividend tax, the saving at modest income is small or negative. Don’t guess — our calculator runs the real 2026 numbers both ways.
2. Liability
A limited company is a separate legal person, so in most cases your personal assets are protected if the business runs into debt. A sole trader and the business are legally the same. If your work carries real financial risk, that protection alone can justify incorporating.
3. Admin and privacy
A sole trader files one Self Assessment a year. A limited company files with both Companies House and HMRC, keeps statutory records, and appears on the public register. Manageable with good software — but more than nothing.
So which should you choose?
| Your situation | Likely best |
|---|---|
| Just starting, modest income, low risk | Sole trader |
| Profits into the higher-rate band, or real liability risk | Limited company |
| Somewhere in between | Run the numbers — it genuinely depends |
There’s no penalty for starting simple. Plenty of businesses run as a sole trader for a year or two and incorporate once it clearly pays.
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