Self-Employed vs Limited Company in the UK

Should you set up as a sole trader or form a limited company? It is one of the first decisions every new business owner faces, and it affects how much tax you pay, how much paperwork you do, what happens if things go wrong and even how some customers see you.

There is no answer that suits everyone. This guide sets out how each structure works, what it costs to run and the questions that usually settle it. The figures are for the 2026/27 tax year (6 April 2026 to 5 April 2027) and apply in England, Wales and Northern Ireland. Scotland sets its own Income Tax bands, so Scottish taxpayers will see different numbers. Tax rules change often, so check the current position on GOV.UK or with an accountant before you commit.

The short version

• Sole trader: quick and free to set up, light on admin, and every penny of profit after tax is yours. But you and the business are legally the same person, so you are personally liable for its debts.
• Limited company: a separate legal entity that protects your personal assets in most situations and can be more tax-efficient once profits reach a certain level. It brings more paperwork, public filings and accountancy costs.

Working as a sole trader

Being a sole trader is the simplest way to run a business. You can start trading straight away under your own name or a trading name, as long as the name doesn't include "Limited", "Ltd" or "plc", or suggest a connection you don't have.

You need to register for Self Assessment with HMRC by 5 October following the end of the tax year in which you started. If you begin trading in November 2026, for example, that falls in the 2026/27 tax year, so the deadline to register is 5 October 2027. If your trading income in a year is £1,000 or less, the trading allowance usually means you don't need to tell HMRC about it, although you should still keep records.

Your profits are added to any other income, such as wages from a job, and taxed through your Self Assessment return. The tax is due by 31 January after the end of the tax year, and once your bill passes a certain level you will also make payments on account towards the following year, due in January and July.

Tax and National Insurance as a sole trader in 2026/27

• Income Tax: nothing on the first £12,570 (the Personal Allowance), 20% from £12,571 to £50,270, 40% from £50,271 to £125,140 and 45% above that. The Personal Allowance is gradually withdrawn once income goes over £100,000.
• Class 4 National Insurance: 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270.
• Class 2 National Insurance: no longer a compulsory charge. If your profits are above the small profits threshold (£7,105 for 2026/27), you are treated as having paid it, which protects your State Pension record. Below that threshold you can choose to pay voluntarily.

As a simple illustration, a sole trader with £30,000 of profit and no other income would pay £3,486 in Income Tax and £1,045.80 in Class 4 National Insurance for 2026/27, a total of £4,531.80. Real bills depend on other income, allowances and pension contributions.

Making Tax Digital

Making Tax Digital for Income Tax started on 6 April 2026 for sole traders and landlords whose qualifying income (turnover from self-employment and property, before expenses) is over £50,000. Those affected keep digital records and send quarterly updates to HMRC through compatible software. The threshold is due to fall to £30,000 from April 2027 and £20,000 from April 2028, so even if it doesn't apply to you yet, choose bookkeeping software that can cope with it.

Running a limited company

A limited company is a separate legal person. It owns its assets, signs its contracts and owes its own debts. As a director and shareholder, your liability is normally limited to the money you have put in, which is the main reason many people choose this route. In practice, banks and landlords often ask the directors of new companies for personal guarantees, so the protection has limits.

You set up a company by registering it with Companies House. The online incorporation fee went up to £100 on 1 February 2026. Since 18 November 2025, new directors and people with significant control have had to verify their identity with Companies House, and existing directors have been given a twelve-month window, tied to their company's confirmation statement, to do the same. Every company also needs a registered office at an "appropriate address" (a PO box no longer qualifies) and a registered email address.

Ongoing responsibilities include:

• filing a confirmation statement every year (£50 when filed online)
• preparing annual accounts and filing them with Companies House
• registering for Corporation Tax, filing a company tax return and paying the tax, normally nine months and one day after the end of the accounting period
• running a PAYE payroll if the company pays salaries, including to you
• keeping proper company records and a separate business bank account

You may also need to file a personal Self Assessment return, depending on what you take out of the company and what other income you have.

How company profits are taxed in 2026/27

The company pays Corporation Tax on its profits. For the financial year that began on 1 April 2026, the rate is 19% on profits up to £50,000 and 25% on profits over £250,000, with marginal relief smoothing the step between the two.

You then take money out, usually through a mix of salary and dividends.

• Salary is a business expense, so it reduces the company's Corporation Tax bill. It goes through PAYE with Income Tax and National Insurance deducted. Employer National Insurance is 15% on pay above £5,000 a year. The Employment Allowance (up to £10,500) can offset this for many employers, but not for a company whose only employee paid above the secondary threshold is a director.
• Dividends are paid from profits after Corporation Tax. The first £500 is covered by the dividend allowance. From 6 April 2026, dividends above that are taxed at 10.75% for basic rate taxpayers, 35.75% at the higher rate and 39.35% at the additional rate. The basic and higher rates each went up by two percentage points this year.

Put together, the tax advantage of a company over self-employment is smaller than it was a few years ago, particularly at modest profit levels. A company tends to make more sense when profits are comfortably above what you need to live on, so some money can stay in the business, or when you want to make pension contributions through it.

It isn't only about tax

Liability and risk

If your work could lead to large claims, or you need to sign big contracts, leases or stock commitments, the protection of a limited company counts for more. Good insurance matters whichever structure you choose.

How customers see you

Some larger organisations prefer to buy from limited companies, and certain contracts require it. For a hairdresser, gardener or tutor working with the public, it rarely makes a difference.

Contracting and IR35

If you plan to work through your own company for a single client in a way that looks like employment, the off-payroll working rules (usually called IR35) may apply. These can wipe out much of the tax benefit, so take advice before setting up a company purely for contracting.

Privacy

A company's name, its directors, a correspondence address for each of them, their month and year of birth and the company's accounts all appear on the public register. You can give a service address instead of your home address for the public record, but your involvement will be visible.

Cost and time

A company needs more bookkeeping, and most owners pay an accountant to prepare the accounts and returns. Build that fee into your forecasts.

Taking money out

A company's money is not your money. Taking cash out without treating it properly as salary, dividends or expenses creates a director's loan, which comes with its own tax rules. Sole traders can draw on their profits as they please, although the tax is due either way.

What about partnerships?

If you are starting with someone else, an ordinary partnership works much like being a sole trader. Each partner registers for Self Assessment, pays tax on their share of the profits and is personally liable for the business's debts. A limited liability partnership (LLP) gives partners limited liability but involves Companies House filings similar to a company. Whichever you choose, put a written agreement in place from day one.

Questions to help you decide

• How much profit do you realistically expect in your first two years?
• Do you need all of that profit to live on, or could some stay in the business?
• Could a mistake or a bad debt leave you facing a large personal bill?
• Do your target customers expect to deal with a limited company?
• Are you happy to keep more detailed records and pay for accountancy support?
• Do you plan to bring in investors or co-owners?

Next steps

Whichever structure you choose, write it into your plan along with the tax you expect to pay, so your forecasts show the money you will actually have. Our guide on how to write a business plan covers the financial sections in more detail. For help keeping records from the start, the bookkeeping and basic accounts guide and templates on our Start-up Toolkits page are free to download, and you'll find more practical guides on the HEY Start-ups blog.