Which pays less tax — a sole trader or a limited company?
Short answer
At profits under roughly £30,000 a year, sole traders often pay the same or less overall once accounting fees are counted. At higher profits, a limited company can save significant tax by paying a small salary and taking dividends. Many businesses incorporate when profits consistently exceed £30,000–£50,000.
There is no single answer — it depends on your profit level, and the gap has narrowed in recent years.
Lower profits: sole trader usually wins
As a sole trader you pay income tax and National Insurance on your profits through Self Assessment. At profit levels under about £30,000, the overall tax burden is often similar to — or lower than — running a limited company, once you factor in the extra accountancy fees a company typically involves. Registration is also far simpler: you only need to register with HMRC, with no Companies House filings, statutory registers, or Confirmation Statements.
Higher profits: a company starts to save tax
A limited company pays Corporation Tax on its profits — 19% where profits are under £50,000, rising to 25% for profits over £250,000. Directors can structure their pay tax-efficiently by taking a small salary plus dividends, which are taxed at lower rates than ordinary income. That is why many businesses incorporate once annual profits consistently exceed around £30,000–£50,000: at that point the tax savings typically outweigh the additional administrative and accounting costs. The 2023 rise in Corporation Tax to 25% for the largest profits narrowed this advantage, but did not close it.
Tax is not the only factor, though:
- Liability: a sole trader is personally liable for all business debts — creditors can pursue your home. A company limits your exposure to what you invest, unless you give personal guarantees.
- Admin: a company must file annual accounts and a Confirmation Statement (£34 online) even if it has a single director-shareholder.
- Credibility: companies often look more established to larger clients and are easier to sell or pass on.
You can start as a sole trader and incorporate later — HMRC's incorporation relief lets you transfer the business into a company while deferring capital gains tax. Because the crossover point depends on your exact figures, ask an accountant to model both structures before deciding.
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Self Assessment is the system HMRC uses to collect income tax and National Insurance from people whose income is not fully taxed at source through PAYE. If you are self-employed, a company director, a landlord, or have other untaxed income, you must file a personal tax return each year. The system has several features that catch first-time filers off guard — most notably the payments on account regime, which can make your first January tax demand significantly larger than expected. This guide explains exactly who must file, every relevant deadline, how payments on account work, and what penalties apply if you miss them.
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