Self Employed vs Limited Company
Self Employed vs Limited Company
Sole trader or limited company? Compare tax, personal liability, running costs and flexibility to choose the right structure for your UK business.
What is the difference between self-employed and a limited company?
The fundamental difference is who legally owns and operates the business, who pays tax on its profits and who is responsible for its debts.
Self-employed
As a sole trader, you and your business are legally the same person. You normally pay Income Tax and self-employed National Insurance on taxable business profits.
You can withdraw business money for personal use, but those drawings do not reduce your taxable profits.
Often suitable for: freelancers, consultants, tradespeople and small businesses wanting straightforward administration.
Limited company
A limited company is a separate legal entity. It owns its assets, enters contracts and pays Corporation Tax on taxable profits.
Directors and shareholders can receive money through salary, dividends, expense reimbursements and other lawful arrangements.
Often suitable for: businesses with commercial risks, expansion plans, retained profits or multiple owners.
Sole trader vs limited company: key differences
Use this comparison to identify which issues matter most for your business.
| Feature | Sole trader | Limited company |
|---|---|---|
| Legal identity | You and the business are one legal person. | The company is legally separate from its owners. |
| Personal liability | Generally unlimited. | Shareholder liability is normally limited, subject to exceptions. |
| Tax on profits | Income Tax and Class 4 NI where applicable. | Corporation Tax, with potential personal taxes on extraction. |
| Taking money out | Drawings; no separate tax on the withdrawal itself. | Salary, dividends or other properly recorded payments. |
| Profit retention | Taxed personally even if cash stays in the business. | After-tax profits can remain within the company. |
| Annual filings | Self Assessment and relevant MTD obligations. | Company accounts, Corporation Tax return and confirmation statement, plus personal obligations. |
| Public information | Generally less public financial disclosure. | Company information and filed accounts are publicly accessible. |
| Administration | Usually simpler. | More statutory and accounting requirements. |
| Business ownership | Owned by one individual. | Shares can be held or transferred, subject to applicable rules. |
| Business continuity | Closely tied to the individual. | The company can continue despite changes in ownership. |
| Funding | Personal or business borrowing. | Borrowing and potential share investment. |
| Typical accounting cost | Usually lower. | Usually higher due to extra compliance. |
Which pays less tax: self-employed or limited company?
There is no universal winner. Your total tax depends on annual profits, other income, how much you need personally, your location and whether company profits are retained or distributed.
How sole trader tax works
Tax is calculated on taxable profits, not turnover and not the amount transferred to your personal bank account.
For 2026/27, the standard Personal Allowance is £12,570, subject to income-based reductions.
In England, Wales and Northern Ireland, the main non-savings Income Tax rates are 20%, 40% and 45%.
Class 4 NI is generally 6% on relevant profits between £12,570 and £50,270 and 2% above that level.
Scottish taxpayers have different rates and bands for non-savings, non-dividend Income Tax.
How limited company tax works
A company pays Corporation Tax on taxable profits, generally at 19% for qualifying small profits and 25% at the main rate, with marginal relief where eligible.
Relevant profit thresholds are normally £50,000 and £250,000, adjusted for short periods and associated companies.
Salary can create PAYE and National Insurance liabilities. Dividends are normally paid from distributable profits after Corporation Tax and may create personal dividend tax.
For 2026/27, dividend tax rates are 10.75%, 35.75% and 39.35%, with a £500 dividend allowance.
Example: a business making £60,000 annual profit
Imagine a UK consultant earns £85,000 in revenue and incurs £25,000 in allowable business costs, leaving £60,000 profit before the owner's remuneration and relevant taxes.
Sole trader
The £60,000 taxable profit is normally subject to personal Income Tax and Class 4 National Insurance, regardless of how much cash is withdrawn.
Limited company
Company profit depends on the salary, employer costs and other deductible expenses. Remaining taxable profits are subject to Corporation Tax.
Personal extraction
If the owner needs all available cash, the company must also account for personal taxes on salary and dividends. Retaining profits changes the comparison.
This example demonstrates why identical commercial profits do not necessarily produce identical take-home pay. A personalised comparison should model both structures using the same assumptions.
Explore our UK dividend tax guide, limited company tax guide and director's salary guide.
Should you be a sole trader or a limited company?
Answer six practical questions to see which structure may deserve closer consideration. No personal information is collected.
Personal liability: why your legal structure matters
As a sole trader
Business debts are generally your personal responsibility. If the business cannot meet its obligations, personal assets may be exposed to claims.
Insurance, sensible contracts and financial controls remain important ways to manage commercial risk.
As a limited company director
The company is generally responsible for its own debts. Shareholders' liability is normally limited to unpaid amounts on their shares.
However, personal guarantees, misconduct, breaches of directors' duties and certain statutory liabilities can create personal exposure.
When does each structure make more sense?
A freelance designer
Working alone, with modest overheads and a need to withdraw most earnings. Sole trader status may offer useful simplicity and lower administration costs.
A growing consultancy
Profitable contracts, commercial risks and money available to reinvest. A limited company may offer advantages worth modelling, including profit retention.
A business taking on investors
Multiple owners and planned investment often make the share ownership and continuity features of a limited company attractive.
There is no reliable rule that you must incorporate when profits reach £30,000, £50,000 or £100,000. Those figures are not statutory incorporation thresholds.
Accounting requirements and ongoing responsibilities
Sole trader checklist
- Register for Self Assessment when required.
- Keep accurate income and expense records.
- Submit tax returns and pay tax by the relevant deadlines.
- Check VAT registration requirements.
- Comply with Making Tax Digital for Income Tax when within scope.
- Maintain appropriate business insurance.
Limited company checklist
- Incorporate and maintain company details.
- Keep company and personal finances distinct.
- Prepare and file annual statutory accounts.
- File Corporation Tax returns and pay tax on time.
- Submit confirmation statements.
- Operate PAYE and record dividends where applicable.
- Meet directors' duties and identity verification requirements.
For further guidance, see Making Tax Digital, Companies House personal codes and our accounting fees.
Can you change from self-employed to a limited company?
Yes. Many business owners begin as sole traders and incorporate later when their commercial circumstances change.
Review the numbers
Compare tax, extraction requirements, accounting costs, insurance and future growth before deciding.
Form the company
Register the company, arrange banking and accounting records, and consider how existing contracts and assets transfer.
Manage the transition
Deal with final sole trader records, company registrations, VAT and PAYE where applicable, and any tax implications of transferring goodwill or other assets.
Incorporation can involve more than simply changing a name on invoices. Contracts, loans, employees, VAT registrations and asset transfers may need separate attention.
Self-employed vs limited company FAQs
Is it better to be self-employed or have a limited company?
It depends on your profits, personal income needs, business risks and plans. Sole trader status is generally simpler. A limited company may offer liability protection and greater flexibility over ownership and retained profits.
At what profit should I become a limited company?
There is no fixed profit threshold. Incorporation should be assessed using a detailed comparison of personal tax, Corporation Tax, National Insurance, dividends and additional accounting costs, together with commercial considerations.
Do limited companies pay less tax than sole traders?
Not necessarily. A company pays Corporation Tax and its owners may pay further tax when extracting profits. The overall outcome depends on remuneration, other income, profit retention and available reliefs.
Can I be self-employed and own a limited company?
Yes. You can operate a separate sole trader business and also be a shareholder or director of a limited company. Each activity must be properly accounted for and reported.
Can I use a business name as a sole trader?
Yes, subject to business naming rules. You must disclose your own name and business details where required. Using a trading name does not create a separate legal entity.
Does a limited company protect my house?
A limited company normally separates company debts from shareholders' personal assets, but protection is not absolute. Personal guarantees, misconduct and other legal exceptions can create personal liability.
Can I pay myself dividends instead of a salary?
A shareholder may receive dividends where sufficient distributable profits exist and the relevant company formalities are followed. Dividends cannot simply be substituted for salary in every circumstance, and National Insurance and other consequences require review.
Is IR35 relevant to a limited company?
It can be. Contractors providing services through a personal service company may fall within the off-payroll working rules, depending on the engagement and the responsible party's status determination. Incorporation alone does not remove employment-status risk.
Do I need an accountant for a limited company?
There is generally no universal legal requirement to appoint an accountant, but directors remain responsible for statutory filings and accurate records. Professional support can help with compliance, tax planning and avoiding costly mistakes.
Can I switch back from a limited company to sole trader?
Yes, but the company must be dealt with properly. This may involve transferring business activities, settling liabilities and closing or retaining the company. Tax consequences should be checked before making changes.
Which structure should you choose?
Choose sole trader status for simplicity when you are working independently, have manageable commercial risks and value straightforward administration.
Consider a limited company for structure and flexibility when you want separate legal ownership, have greater business risks, plan to introduce shareholders or may retain profits for future investment.
The right answer should follow from your circumstances, not from a generic claim that one structure always saves tax.
Make the right decision for your business
The Online Accountants helps UK business owners understand their accounting obligations, compare business structures and manage tax-efficient, compliant businesses.
Speak to an Accountant → View Fixed Fees → Do I Need an Accountant? →Prepared by The Online Accountants, a trading name of Parkinson (UK) Limited. Reviewed for the 2026/27 UK tax year, October 2026. General information only; individual tax treatment depends on circumstances and applicable legislation.