Sole Trader vs Limited Company: Which Is Right for You in 2026/27?

Should I be a sole trader or set up a limited company? It is one of the most common questions we are asked by business owners. And while there unfortunately is not a one-size-fits-all answer, having the right, up-to-date information can help you make the decision that is right for you.

Tax is one of the things to consider, but it is not the only one. In this quick guide, we will talk through the key differences between operating as a sole trader and a limited company, including the advantages, disadvantages and tax implications of each.

Sole trader vs limited company at a glance

Sole trader: Generally simpler to set up and run (and with less paperwork). However, you and your business are legally the same, so you are personally responsible for any business debts.

Limited company: A limited company is legally separate from you. There is more paperwork (compliance) and more responsibility when it comes to accounts and reporting, but your personal liability is limited.

There can also be tax differences between the two, but which works out better will depend on your profits and individual circumstances.

Sole trader pros and cons

As a sole trader, you run your business as an individual. It is generally the simplest way to get started, with less paperwork and fewer reporting requirements than running a limited company.

You keep the profits your business makes after tax, but there is no legal separation between you and the business. That means you are also personally responsible for any debts or liabilities.

Advantages

• Simple to set up and run: There is generally less paperwork and admin involved. If you earn more than £1,000 in a tax year, you will usually need to register as a sole trader with HMRC and complete a Self Assessment tax return.
• You are in control: You make the decisions and can take money from the business without having to pay yourself a salary or dividends.
• More privacy: Unlike a limited company, your business accounts aren’t published at Companies House.

Disadvantages

• Personal liability: Because you and the business are legally the same, you are personally responsible for business debts.
• Tax: As your profits increase, the amount you pay in Income Tax and National Insurance will increase too.
• It may not suit your longer-term plans: Depending on where you want to take the business, there may come a point when operating through a limited company makes more sense.

What tax does a sole trader pay in 2026/27?

As a sole trader, you pay Income Tax on your taxable profits. For 2026/27, the standard Personal Allowance in England, Wales and Northern Ireland is £12,570. You then pay 20% Income Tax on taxable income within the basic-rate band and 40% on income within the higher-rate band.

You may also pay Class 4 National Insurance. For 2026/27, this is 6% on profits between £12,570 and £50,270 and 2% on profits above £50,270.

Class 2 National Insurance is no longer something paid by most self-employed people. If your profits are £7,105 or more, your Class 2 contributions are treated as having been paid to protect your National Insurance record.

A note on Making Tax Digital

Sole traders still face less paperwork than limited companies, but that gap has narrowed. From 6 April 2026, Making Tax Digital for Income Tax became mandatory for sole traders and landlords with qualifying gross income over £50,000. That means keeping digital records and sending HMRC quarterly updates through compatible software, as well as completing the year-end tax return process. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028, so if it does not affect you yet, it may soon.

What tax does a limited company pay in 2026/27?

A limited company works differently because the company is legally separate from you.

This separation can limit your personal liability, but it also brings additional responsibilities. The company has its own accounts and tax obligations, and there are rules around how you take money out of the business.

Advantages

• Limited liability: In most circumstances, the company’s finances are separate from your personal finances.
• More options for taking income: Depending on your circumstances, you may be able to take a combination of salary and dividends. In most scenarios, this is the most tax-efficient way of taking money out.
• It can support future plans: A limited company structure may be more suitable if you plan to grow, bring other people into the business or seek investment.
• Credibility: In some industries, clients, suppliers or organisations prefer to work with limited companies.

Disadvantages

• More administration: There are more filing, accounting and record-keeping responsibilities when running a limited company.
• Less privacy: Information about the company and its accounts is filed with Companies House and some of it is publicly available.
• Additional costs: Running a limited company can involve higher accountancy and administration costs.
• Taking money out is different: The company’s money isn ot automatically your personal money. How and when you take money from the company needs to be considered properly.

What tax does a limited company pay in 2026/27?

A limited company pays Corporation Tax on its profits.

For companies with profits of £50,000 or less, the small profits Corporation Tax rate is 19%. The main rate is 25% for profits over £250,000, with Marginal Relief potentially applying between £50,000 and £250,000.

The thresholds can be reduced where there are associated companies or a short accounting period, so the exact Corporation Tax position will depend on the individual business.

Directors may then take money from the company through salary, dividends or a combination of the two.

For 2026/27, the Dividend Allowance is £500. Dividend tax rates above the allowance are 10.75% for basic-rate taxpayers, 35.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers.

It’s not just about tax

Tax is important, but it should not be the only reason you choose one business structure over another.

You also need to think about how much financial risk the business carries, whether you plan to grow or bring other people into the business, whether you need investment, how much administration you are comfortable with and how much of the money the business makes you actually need to take out personally.

Privacy may matter too. A sole trader’s accounts remain private, whereas certain information about a limited company is publicly available through Companies House. Including the registered address.

The right structure now might not necessarily be the right structure in a few years’ time either. Your business can change, and your structure can change with it.

When might being a sole trader make more sense?

Being a sole trader could suit you if:

• You are starting a relatively straightforward business on your own
• You want to keep paperwork and administration to a minimum
• Your business carries relatively little financial risk
• You want straightforward access to the money your business makes
• There is not currently a strong commercial or financial reason to incorporate

When might being a limited company make more sense?

A limited company could be worth considering if:

• Limiting your personal liability is important
• Your business is growing or becoming more complex
• You plan to bring in other shareholders or investment
• Clients or organisations in your industry prefer to work with limited companies
• You don’t need to take all of the company’s profits out personally
• Your accountant has worked through the figures and a limited company makes more sense for your circumstances

There is no single point at which every sole trader should become a limited company. It needs to be looked at in the context of the business and the person running it.

Frequently asked questions

At what profit should I become a limited company?

There is not a set profit figure at which you should automatically switch to a limited company. Tax is only part of the calculation, and the answer will depend on things like your other income, how much money you need to take from the business and your plans for the future.

Do limited companies pay less tax than sole traders?

Not necessarily. A limited company pays Corporation Tax on its profits, and you may then personally pay tax when you take money from the company as a dividend. Whether that works out better than operating as a sole trader depends on your circumstances.

Can I change from sole trader to limited company later?

Yes. Plenty of businesses start as sole traders and incorporate later as the business grows or their circumstances change. There are tax and administrative implications to consider when making the change, so it is worth getting advice before you do it.

Is it easier to be a sole trader?

From an administrative point of view, usually yes, although Making Tax Digital has added quarterly reporting for sole traders above certain income levels. There are still generally fewer requirements than running a limited company, but ‘easier’ does not necessarily mean it is the right structure for every business.

Sole trader or limited company: which is right for you?

At Blue Leaf Accounting in Leighton Buzzard, this is a question we regularly talk through with business owners, and the answer is not simply about which option appears to save the most tax.

Your profits, plans for the business, other income and personal circumstances all need to be considered.

Not sure which structure makes sense for your business? We can look at your numbers and plans, talk you through the options and help you work out which route is right for you.

Last reviewed: September 2026. Tax information and rates are based on the 2026/27 tax year.