Starting a business in the UK? One of the first big choices is how to set it up. Most small businesses start as a sole trader or a limited company. Both are legal and both are common. The right choice depends on your profit, your plans and how much paperwork you are happy to do.
This guide explains the main differences in simple English. The tax figures are for the 2026/27 tax year (6 April 2026 to 5 April 2027), checked on GOV.UK.
What is a sole trader?
A sole trader is a self-employed person who runs a business on their own. You and the business are the same in law. You keep all the profit after tax, but you are also personally responsible for the business debts. GOV.UK calls this “unlimited liability”. If the business owes money it cannot pay, your own savings and property could be at risk.
Setting up is simple. You register with HMRC for Self Assessment. You must do this if you earn more than £1,000 from self-employment in a tax year. After that, you keep records and send one Self Assessment tax return each year.
Many taxi and Uber drivers, builders, cleaners and other trades start as sole traders because it is quick and cheap to run.
What is a limited company?
A limited company is a separate legal “person”. It is registered at Companies House. The company owns the business, signs contracts and pays its own tax. You are usually a director (you run it) and a shareholder (you own it).
The big benefit is limited liability. In most cases, the company’s debts belong to the company, not to you personally. But directors have legal duties. GOV.UK says directors stay legally responsible for the company’s records, accounts and performance, even if they pay an accountant to help.
A limited company must, every year:
- prepare and file annual accounts
- file a Company Tax Return and pay Corporation Tax
- keep company records up to date at Companies House
If you want to go this way, see our company formation service and our guide to limited company accounts.
How a sole trader pays tax (2026/27)
A sole trader pays Income Tax and National Insurance on their profit (income minus allowable expenses).
Income Tax rates for 2026/27 (England, Wales and Northern Ireland):
- Personal Allowance: first £12,570 – 0%
- Basic rate: £12,571 to £50,270 – 20%
- Higher rate: £50,271 to £125,140 – 40%
- Additional rate: over £125,140 – 45%
Your Personal Allowance goes down by £1 for every £2 of income above £100,000. Scotland has different Income Tax rates.
Class 4 National Insurance for 2026/27:
- 6% on profits between £12,570 and £50,270
- 2% on profits over £50,270
Class 2 National Insurance is no longer paid if your profits are £7,105 or more. It is treated as paid, so your State Pension record is protected. If your profits are lower, you can choose to pay voluntary Class 2 at £3.65 a week.
You pay all of this through your Self Assessment tax return.
How a limited company pays tax
The company pays Corporation Tax on its profits. The current GOV.UK rates are:
- 19% (small profits rate) if profits are £50,000 or less
- 25% (main rate) if profits are over £250,000
- Between £50,000 and £250,000, the company pays the main rate but can claim Marginal Relief, so the real rate is between the two
These limits are smaller if the company has a short accounting period or has associated companies. For most small companies, Corporation Tax must be paid 9 months and 1 day after the end of the accounting period.
The money in the company is not your money. To take it out, directors usually use a mix of:
- Salary – paid through payroll (PAYE), with Income Tax and National Insurance
- Dividends – paid to shareholders out of profit after Corporation Tax
Dividend tax for 2026/27:
- Dividend Allowance: first £500 tax-free
- Basic rate taxpayers: 10.75%
- Higher rate taxpayers: 35.75%
- Additional rate taxpayers: 39.35%
Note: the basic and higher dividend rates went up from April 2026. Older articles online may show the old rates.
Which pays less tax?
There is no single answer. In the past, many people chose a limited company to save tax. Today the gap is smaller for many people, because Corporation Tax can be up to 25% and dividend tax rates are higher in 2026/27.
As a rough rule:
- If your profit is small, a sole trader is often simpler and the tax saving from a company may not cover the extra costs.
- If your profit is higher, and you can leave some profit in the company, a limited company may save tax.
The right answer depends on your own numbers: your profit, other income, pension plans, and how much money you need to take out each year. An accountant can compare both options for you.
Other things to think about
- Paperwork: A sole trader sends one tax return a year. A company has accounts, a Company Tax Return, Companies House filings, and usually payroll for the director.
- Privacy: Company details, such as directors’ names and accounts, are on the public Companies House register.
- Image: Some larger clients and contractors prefer to work with limited companies.
- Making Tax Digital: Sole traders with higher income must now keep digital records and send quarterly updates. See our bookkeeping service for help.
- VAT: Both sole traders and companies must register for VAT if they go over the threshold. See our VAT returns service.
- Changing later: Many people start as a sole trader and move to a limited company when profits grow. This is common and allowed.
How UK Tax Co can help
We work with sole traders and limited companies all over the UK, online. Our fixed prices include:
- Self Assessment tax return: £120
- Company Formation: £150
- Company Accounts: £50 per month (includes 1 payroll)
FAQ
Can I switch from sole trader to limited company later?
Yes. Many businesses start as sole traders and set up a company later when profits grow. You will need to tell HMRC and send a final Self Assessment for the sole trader business.
Do I need an accountant for a limited company?
It is not a legal rule, but company accounts and tax returns are more complex. Many directors use an accountant. You are still legally responsible as a director.
What are the Corporation Tax rates now?
19% on profits of £50,000 or less, 25% on profits over £250,000, and Marginal Relief in between.
What is the tax-free dividend allowance?
£500 for the 2026/27 tax year.
Is a sole trader personally responsible for debts?
Yes. Sole traders have unlimited liability, so personal assets can be at risk.
This article is general guidance, not personal tax advice.
Need help? Call UK Tax Co on 020 7050 0712 or WhatsApp 07579566666.