This is a question I am asked regularly, and the answer really is it depends on your expected profit for the year. You should always seek advice, on an individual case by case basis. It is also important to mention, at any point the government can change rates, rules and end of year processes. I wrote this blog 19th July, 2026 and the details are correct at this time.
Sole Traders normally submit their Self-Assessment tax return by 31 January following the end of the tax year and pay any Income Tax and National Insurance due. The normal tax allowance and tax bands apply if you are a Sole Trader or an employee, but the National Insurance is different.
Advantages of being a Sole Trader
A Sole Trader, Self-employed, has much simpler accounts and so the first advantage is your accounts costs are cheaper. There is less work involved, especially if you are organised, and therefore takes up less of your accountant’s time.
Self-employed individuals with profits above the relevant threshold generally pay Class 4 National Insurance and may receive National Insurance credits towards State Pension entitlement.
All profits belong to you, apart from your tax and national insurance or course.
You can claim costs relating to the running of your business.
You can employ staff and put the staff wages through PAYE.
Disadvantages of being a Sole Trader
You personally are liable for all costs. This includes supplier invoices, vehicle maintenance, negligence claims and employment tribunal claims.
Advantages of a Limited Company
Your personal tax bill can be a combination of dividends and wages. For example, many directors will claim a salary of £12570 and the rest in dividends. I should mention this is not always the best way to split the salary and dividends and again this depends on individual circumstances.
A Limited Company may provide additional tax saving opportunities depending on the nature of the business and the owner’s circumstances. Professional advice should always be sought before making decisions based on tax considerations.
Customers may see a Limited Company as more professional, than a Sole Trader.
A Limited Company is a separate legal entity, meaning the company is generally responsible for its debts and liabilities. However, directors can still be personally liable in certain circumstances, such as providing personal guarantees or acting unlawfully.
As profits increase, a Limited Company structure can sometimes offer tax planning opportunities that are not available to Sole Traders
Disadvantages of a Limited Company
You must be registered with Companies House, therefore there is more admin and compliance associated with a Limited Company.
The accounts are more complex, your accountants bill maybe higher. Depending on how you pay yourself, you might have to complete a self-assessment as well as end of year accounts and a corporation tax calculation.
Dividends can generally only be paid where sufficient distributable profits are available.
A Limited Company can create additional National Insurance costs, including Employer’s National Insurance payable by the company and Employee National Insurance payable by directors and employees, depending on earnings levels.
Your business will need to pay corporation tax, and you are also liable for tax on earnings.
To Consider
Are you planning on growing your business in the next 3-5 years, or do you intend for your business to stay the way it is? If you have growth and expansion plans, it may be worth considering whether a Limited Company structure is suitable for your business.
If you need to withdraw all of the profits from the business to cover living costs, the benefits of incorporating may be reduced.
Are you thinking of moving or remortgaging in the next 12-24 months, don’t change anything before seeking advice from a mortgage advisor.
Pension Contributions – Employer pension contributions made by a Limited Company may qualify for Corporation Tax relief, subject to HMRC rules.
Making Tax Digital (MTD) for Income Tax – Many Sole Traders and landlords will be brought into Making Tax Digital over the next few years. By 6 April 2028, those with qualifying income over £20,000 are expected to be required to maintain digital records and submit quarterly updates using MTD-compatible software. This means that digital bookkeeping will become increasingly important, regardless of the business structure you choose.
Privacy: Sole Trader accounts are not publicly available, whereas certain information about Limited Companies is filed at Companies House and can be viewed publicly.
In Conclusion
There is no “one size fits all” answer when deciding whether to operate as a Sole Trader or Limited Company.
The right structure will depend on a number of factors, including:
• Your expected profits
• Whether you need to withdraw all profits from the business
• Your future growth plans
• Your attitude to risk and liability
• Whether you intend to employ staff
• Your pension and retirement planning goals
• Any plans to apply for a mortgage or other borrowing
While a Sole Trader business can offer simplicity and lower compliance costs, a Limited Company can provide liability protection and additional planning opportunities as a business grows.
Before making any decision, it is important to review your circumstances and goals with a qualified accountant. What works well for one business owner may not be the best option for another.
If you’re unsure which structure is right for your business, get in touch with Hislop Business Solutions for a friendly, no-obligation discussion about your options.
