Limited company or self-employed: which suits you?

Many people start as sole traders and later wonder whether to set up a limited company. Others start with a company from day one. Here are the main differences for the 2026-27 tax year.

Liability

As a sole trader, you and the business are the same in law. If the business owes money, you are personally responsible, and your savings or home could be at risk.

A limited company is a separate legal person. Its debts are normally its own, and shareholders' liability is limited to what they paid, or owe, for their shares. There are exceptions: personal guarantees, wrongful trading and fraud can make a director personally liable.

Tax

Sole traders pay Income Tax on all their profits, plus Class 4 National Insurance. For 2026-27, Class 4 is 6% on profits between £12,570 and £50,270, and 2% above that.

A limited company pays Corporation Tax on its profits:

• 19% on profits of £50,000 or less (small profits rate);
• 25% on profits over £250,000 (main rate);
• between these, marginal relief applies.

Directors then take money out as salary (through PAYE) and/or dividends. For 2026-27 the dividend allowance is £500, and dividends above it are taxed at 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate).

Whether a company saves you tax depends on your profits, how much you take out, and whether you can leave money in the company. At lower profit levels the saving may be small or nil once you add accountancy costs. Ask an accountant to run the figures for you.

Paperwork and costs

A sole trader registers for Self Assessment and files one tax return a year. A limited company must:

• file annual accounts with Companies House and HMRC;
• file a Corporation Tax return;
• file a confirmation statement at least once every 12 months;
• run payroll if it pays salaries;
• keep statutory registers;
• make sure every director and person with significant control has verified their identity with Companies House.

This means more admin and usually higher accountancy fees.

Privacy

A sole trader's details are not on a public register. A company's details are: its registered office, directors' names, service addresses and month and year of birth, and its shareholders. You can keep your home address private by using a Registered Office Address and a Director Service Address.

Credibility and growth

Some clients, especially larger businesses, prefer to work with limited companies. A company also makes it easier to:

• bring in partners or investors by issuing shares;
• sell the business or pass it on;
• keep the business name protected on the Companies House register.

Money in and out

As a sole trader, the business money is yours. In a company, it belongs to the company. You can only take it out as salary, dividends (from profits), expenses, or a director's loan, each with its own rules. This discipline suits some people and frustrates others.

When a limited company often makes sense

• Your profits are growing and you do not need to take all of them out.
• Your work carries financial risk, such as large contracts or stock.
• Clients ask you to work through a company.
• You plan to bring in partners or investors.

How Form My Company can help

If a company is right for you, our Digital Package forms it for £290, including the £100 Companies House fee, VAT and HMRC Corporation Tax registration. As a Companies House ACSP, we verify your identity for you as part of the order, and most companies are registered within 24 hours. Staying a sole trader for now? Our Self Assessment service costs £120.

Frequently asked questions