How to switch from sole trader to limited company

Many sole traders move to a limited company once profits grow, for tax reasons, limited liability or credibility with clients. The switch is a series of practical steps. Getting the order right avoids gaps in insurance, banking and tax registrations.

Before you start: is it worth it?

A company pays Corporation Tax on its profits (19% to 25%), and you then take income as salary and dividends. Compared with a sole trader paying Income Tax and Class 4 National Insurance, a company tends to save tax once profits are well above the higher rate threshold, particularly if you leave some profit in the company. It also brings more administration, public accounts and accountancy costs. See sole trader vs limited company, and compare our self-employed take-home calculator with the salary vs dividends calculator.

Step 1: form the company

1. Choose a company name and check it is available.
2. Decide on shareholders and share structure, for example whether a spouse will hold shares (take advice on the settlements rules).
3. Appoint directors and identify people with significant control.
4. Incorporate online through Companies House or a formation agent, with articles of association and a registered office address.

Identity verification

Since 18 November 2025, directors and people with significant control must verify their identity with Companies House, either directly through GOV.UK One Login or through an authorised agent. New directors must verify before being appointed; existing ones by their due dates during the transition.

Step 2: register for taxes

• Corporation Tax: register within three months of the company starting to do business. HMRC sends the company’s Unique Taxpayer Reference after incorporation.
• PAYE: register as an employer before the first payday if you will pay yourself or others a salary. See setting up PAYE.
• VAT: if the sole trade was VAT-registered, the company can take over the VAT number (form VAT68) as a transfer of a going concern, or register separately.

Step 3: banking, insurance and contracts

• Open a business bank account in the company’s name.
• Put insurance in the company’s name: professional indemnity, public liability, and employers’ liability if you will employ anyone, including yourself as a director in some cases.
• Novate or reissue contracts with customers and suppliers, and update leases, finance agreements and licences.
• Update invoices, website, email signature and stationery with the company’s registered name, number and registered office.

Step 4: transfer the business

Decide what moves into the company and on what terms:

See incorporation relief.

Step 5: close the sole trade

• Tell HMRC you have stopped being self-employed, through your online account or by phone.
• Prepare final sole trader accounts to the date the trade ceased.
• File your Self Assessment return for the year of cessation by 31 January after the tax year, including the final profits.
• Remember that payments on account for the next year may not be needed if your income will now come through PAYE and dividends; you can apply to reduce them.

Step 6: set up company routines

• monthly payroll, if paying a salary
• bookkeeping in company accounting software
• Corporation Tax payment 9 months and 1 day after the year end, and the CT600 within 12 months; see Corporation Tax payment deadlines
• annual accounts and a confirmation statement at Companies House
• keeping the company’s money separate: money you take out is salary, dividends or a director’s loan, each with its own tax treatment; see close company rules

Timing

Many people incorporate at the start of a month or quarter, or align it with their accounting date, to keep the final sole trader accounts simple. Since basis period reform, sole traders are taxed on a tax year basis, so cessation no longer brings old overlap issues for most, though transition profits being spread may become taxable earlier.

Frequently asked questions

Can I transfer my sole trader business to a limited company?

Yes. You form a company, transfer the business and its assets into it, and cease the sole trade.

Do I need to tell HMRC when I change from sole trader to limited company?

Yes. Tell HMRC you have stopped self-employment, register the company for Corporation Tax within three months of trading, and register for PAYE and VAT as needed.

Can my limited company keep my VAT number?

Yes, usually, if the business is transferred as a going concern and the company applies on form VAT68.

What happens to my sole trader tax return?

You file a final Self Assessment return for the tax year in which the sole trade ceased, showing profits up to the date of cessation.