Limited company or sole trader – which is best?
15/10/2025
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Choosing between operating as a sole trader vs a limited company is one of the most important decisions any UK business owner will face—especially in 2025, with updated tax thresholds, shifting regulations, and rising financial pressures. Your choice can significantly impact how much tax you pay, how your business is perceived, and how exposed your personal finances are to risk.
With more entrepreneurs launching startups, taking on freelance work, or expanding their side hustles, the need for clarity on sole trader vs limited company structure has never been greater. While sole traders benefit from simplicity and flexibility, limited companies can offer greater financial efficiency and legal protection.
In this guide, we break down the key legal, tax, and operational differences between the two business structures to help you make the most informed, financially sound decision. Whether you’re a sole trader now or planning a shift, this is your complete 2025 comparison of sole trader vs limited company options.
Sole trader vs limited company: at a glance
Here’s a quick comparison of the two business types. This table gives you an overview of the key differences in legal status, admin duties, tax treatment, and business perception. Use this as your starting point before diving into the detailed breakdowns below.
| Feature | Sole Trader | Limited Company |
|---|---|---|
| Legal Status | You are the business | Separate legal entity |
| Setup Cost | Low | Moderate |
| Financial Risk | Personally liable | Limited liability |
| Privacy | Full privacy | Public company accounts |
| Tax Rates | Income tax & NIC | Corporation tax & dividend tax |
| Admin & Paperwork | Low | Higher |
| Perception | Less formal | More professional |
| Borrowing | Based on personal credit | Company credit possible |
This table helps highlight the surface-level contrast in the sole trader vs limited company debate. Next, let’s explore each in detail.
What is a sole trader?
A sole trader is the simplest and most common business structure in the UK. You operate the business in your name, keep all profits, and are responsible for all losses. It’s ideal for freelancers, consultants, and small business owners just getting started.
Key points:
- Easy and fast to set up via HMRC
- Minimal admin and paperwork
- You submit a Self Assessment tax return annually
- You pay income tax and National Insurance on profits
- You’re personally liable for business debts
- Full privacy—your accounts are not made public
This model offers complete control but can become inefficient or risky as your business grows and profits increase. You’ll face higher income tax rates and have limited options for financial planning. It’s one reason many consider switching from sole trader to limited company later on.
What is a limited company?
A limited company is a more formal business structure where the business is legally distinct from its owners. This separation provides limited liability, meaning yA limited company is a more formal business structure where the business is legally distinct from its owners. This separation provides limited liability, meaning your personal finances are protected in most cases.
Key points:
- Registered through Companies House
- Must submit annual accounts, confirmation statements, and corporation tax returns
- Pays Corporation Tax on profits
- Profits can be paid out via salary and dividends
- Offers limited liability protection
- Company details (including directors and financials) are available publicly
It’s a more complex structure but opens the door to significant tax savings, better pension options, and a more credible professional image—especially if you want to grow, raise investment, or hire employees. This is a common motivation behind choosing a sole trader vs limited company.
Tax differences in 2025
One of the biggest factors when choosing a business structure is how much tax you’ll pay. Here’s how taxation works for each structure in the 2024/25 tax year.
| Tax Type | Sole Trader | Limited Company |
|---|---|---|
| Income Tax | 0% up to £12,57020% up to £50,27040% over £50,270 | n/a – covered under Corporation Tax |
| National Insurance (NIC) | Class 2: £3.45/weekClass 4: 9%/2% above thresholds | PAYE NIC as an employee/director |
| Corporation Tax | n/a | 19% up to £50,00025% over £250,000Marginal relief applies |
| Dividend Tax | n/a | 0% on first £5008.75%, 33.75%, 39.35% |
A key tax planning reason many move from sole trader to limited company is the ability to split earnings into salary and dividends.
Run your limited company with confidence.
Whether you’re just switching from sole trader to limited company or need help with filings, Fusion can take care of the numbers while you grow.
Pros and cons
Let’s break down the advantages and disadvantages of each structure so you can weigh what matters most for your business.
Sole trader: Pros
- Simple to register and manage
- Minimal legal and reporting duties
- Total control over profits and decisions
- Can offset business losses against personal income
Sole trader: Cons
- Personally responsible for all debts and legal risks
- Less tax-efficient at higher incomes
- Can appear less credible to banks or clients
- No legal distinction between personal and business finances
Limited company: Pros
- Liability limited to your investment
- Lower overall tax on high profits
- Improved business image and trustworthiness
- More options for pension contributions and planning
- Can retain profits within the company for future growth
Limited company: Cons
- More legal obligations and paperwork
- Costs for accounting and reporting
- Annual financial statements are public
- Complex rules around profit extraction
2025 income examples: tax comparison
To help visualise the difference in take-home pay, here’s how each structure compares at three income levels in a sole trader vs limited company calculator style format.
| Profit | Structure | Approx. Tax/NIC | Net Income |
|---|---|---|---|
| £20,000 | Sole Trader | £1,340 | £18,660 |
| £20,000 | Limited Company | £1,090 | £18,910 |
| £50,000 | Sole Trader | £11,300 | £38,700 |
| £50,000 | Limited Company | £8,720 | £41,280 |
| £100,000 | Sole Trader | £28,000+ | £72,000- |
| £100,000 | Limited Company | £20,500 | £79,500 |
The data highlights that at higher income levels, limited company vs sole trader becomes more compelling financially.
When should you switch to a limited company?
Timing is everything when making the switch. Here are typical triggers that suggest it might be time to go limited:
- Annual profits exceed £40,000–£50,000
- You want to reduce your tax burden
- You need to protect personal assets from potential claims
- Your business image or growth strategy demands a formal structure
- You’re planning to raise investment or secure contracts with corporates
If your business is growing and you’re reinvesting in equipment, staff, or expansion, moving to a limited company might be the next logical step.
In addition, the ability to take advantage of structured tax planning (through dividends and pension contributions), access to funding, and long-term continuity are important considerations. Sole traders often hit a ceiling where their tax and liability exposure outweighs the simplicity of their current setup. Switching earlier rather than later can ensure smoother migration of finances, client contracts, and internal operations.
Summary: which structure is best for you?
Still unsure? Here’s a cheat sheet for quick reference:
| Situation | Best Fit |
|---|---|
| Testing a new idea, part-time work | Sole Trader |
| Under £30,000 in annual profit | Sole Trader |
| Seeking to protect assets or grow | Limited Company |
| Above £50,000 profit and scaling | Limited Company |
| Planning to raise finance or hire staff | Limited Company |
There’s no one-size-fits-all answer. The ideal structure depends on where you are in your business journey and where you want to go. If you’re just starting out or testing a side hustle, operating as a sole trader offers flexibility and low commitment. But as profits increase, risks rise, and goals become more ambitious, switching to a limited company can unlock powerful tax efficiencies, credibility with lenders and clients, and long-term financial planning advantages.
If you need help deciding whether to operate as a sole trader or a limited company and dealing with the associated Corporation and Income taxes, then we can provide you with a dedicated team of accountants who can help you with your monthly bookkeeping and accounting needs. We will assist you with precisely documenting the revenue generated by your company, ensuring that you comply with HMRC and Companies House regulations. Contact us to find out more.
FAQ’s
Q1. Can I switch from sole trader to limited company mid-year?
Yes. You can switch at any point during the tax year. You’ll need to notify HMRC, set up a new company with Companies House, open a separate business bank account, and possibly re-register for VAT or PAYE. Your sole trader accounts will need to be closed, and your limited company will start fresh records.
Q2. Is it worth setting up a limited company if I earn under £30,000?
For profits under £30,000, the extra admin and accountancy costs often outweigh the tax benefits of a limited company. Many smaller or part-time businesses find operating as a sole trader more flexible and cost-effective until profits grow.
Q3. Can I be both a sole trader and a company director?
Yes. You can run different ventures under each structure at the same time. For example, you might work freelance as a sole trader while also being a director of a limited company. Just make sure to keep bank accounts, tax returns, and records completely separate.
Q4. Will going limited improve my chances of getting a loan?
Often yes. Limited companies can build their own credit rating and are sometimes seen as more stable and professional by banks and investors. However, many lenders will still ask for a personal guarantee from directors, especially for newer companies.
Q5. What happens to my sole trader business if I pass away?
A sole trader business ends with the individual, since you and the business are legally the same. A limited company, however, is a separate legal entity and can continue to trade, be inherited by family, or sold as an asset. Contact us to find out more.
