Most accountants starting a practice begin as sole traders for simplicity, then incorporate once profits consistently exceed £40,000 to £50,000 per year. A limited company typically becomes more tax-efficient at that level, but introduces additional compliance costs and administrative complexity.
Key differences at a glance
| Factor | Sole trader | Limited company |
|---|---|---|
| Tax on profits | Income tax (20%, 40%, 45%) + Class 4 NI (9%/2%) | Corporation tax (19% to 25%) + dividend/salary tax |
| Annual compliance | Self Assessment tax return | Corporation tax return + accounts + confirmation statement |
| Personal liability | Unlimited (you are the business) | Limited to share capital |
| Professional appearance | Some clients prefer Ltd | Generally seen as more established |
| Setup cost | Free (register Self Assessment) | £13 via Companies House |
| Running cost | Lower | Higher (accountant fees, filing costs) |
| Pension contributions | Employer contributions not applicable | Company can make employer pension contributions |
| Flexibility | High | Lower (governed by company law) |
Tax comparison at different profit levels (2025/26)
The breakeven point between sole trader and limited company tax varies depending on how you extract profit from the company. The table below assumes a sole practitioner director extracting profits as salary to the NI threshold plus dividends.
| Annual profit | Sole trader tax | Ltd company tax (optimal extraction) | Saving as Ltd |
|---|---|---|---|
| £30,000 | £5,486 | £5,710 | –£224 (sole trader better) |
| £50,000 | £13,432 | £11,980 | +£1,452 |
| £75,000 | £24,732 | £19,140 | +£5,592 |
| £100,000 | £37,232 | £26,740 | +£10,492 |
Note: figures are illustrative and assume no employment of others, no pension contributions, and basic personal allowance of £12,570. Consult a qualified accountant for advice specific to your situation.
When to start as a sole trader
A sole trader structure makes most sense when:
- You are just starting out and not yet generating significant profit
- You want to keep administrative complexity low
- Your annual profit is below £40,000
- You are testing the market before committing fully
When to incorporate as a limited company
Incorporating becomes worthwhile when:
- Annual profit consistently exceeds £40,000 to £50,000
- You want to protect personal assets from business liabilities
- Potential clients prefer to deal with a limited company
- You want to make employer pension contributions via the business
- You plan to bring in a business partner or issue shares to employees
Companies with profits between £50,000 and £250,000 in 2025/26 pay corporation tax at an effective marginal rate above 19%, tapering towards the 25% main rate. This affects the tax calculation for practices in the growth phase.