The key difference is tax efficiency and liability. As a sole trader, you pay Income Tax and Class 4 NI on all profits. As a director of a limited company, you can take a mix of salary and dividends, often resulting in a lower overall tax bill. However, a limited company comes with significantly more administration and cost.
Quick comparison
| Factor | Sole trader | Limited company |
|---|---|---|
| Set-up | Free, immediate | £12 to £50 to incorporate |
| Annual admin | One Self Assessment return | Company accounts, CT600, Confirmation Statement, payroll |
| Liability | Unlimited personal liability | Limited to share capital |
| Tax on profits (basic rate) | 20% IT + 6% NI = 26% | 19/25% Corporation Tax on profits; dividend tax on drawings |
| Privacy | No public record | Accounts filed at Companies House (public) |
| Accountancy cost | £300 to £600/year | £800 to £2,000+/year |
At what income does a limited company save tax?
The tax savings from operating through a limited company depend on your profit level and personal circumstances. As a rough guide:
- Below £30,000 profit: Unlikely to save significant tax. The extra administration cost may outweigh any saving.
- £30,000 to £60,000 profit: A limited company can save several thousand pounds per year through a salary and dividends structure.
- Above £60,000 profit: Tax savings are typically more substantial, and incorporation usually makes financial sense.
These are estimates only. The exact saving depends on dividend tax rates, Corporation Tax marginal relief, and your personal allowances. Always model your specific figures with an accountant.
How the salary and dividends strategy works
A director of a limited company typically takes:
- A small salary (often set at the NI threshold, around £12,570 for 2025/26)
- The remaining profit as dividends, taxed at lower rates than income
| Dividend tax band (2025/26) | Rate |
|---|---|
| Up to £500 (dividend allowance) | 0% |
| Basic rate taxpayer | 8.75% |
| Higher rate taxpayer | 33.75% |
| Additional rate taxpayer | 39.35% |
When staying as a sole trader makes sense
- Your profit is below £30,000 and the administration saving outweighs any tax benefit
- You are testing a business idea and want to keep things simple
- Your client or employer requires you to operate as an individual
- IR35 would apply to your work anyway (see our IR35 guide)
When to consider incorporating
- Your profits are consistently above £30,000 to £40,000
- You want to retain profits in the business for future investment
- You are taking on significant contracts and need limited liability protection
- You want to bring in investors or business partners
Incorporation has irreversible tax consequences, particularly around goodwill, Capital Gains Tax, and National Insurance. Always consult an accountant before making the decision.
This guide provides general information only and does not constitute financial, tax, or legal advice. For your specific situation, consult a qualified accountant. Find one via our accountant directory.