Limited Company vs Sole Trader: Which Is Best for Tax Purposes?
Introduction
If you're running a small UK business — whether you're a tradesperson, freelancer, creative or consultant — one of the biggest decisions you’ll make is choosing between being a sole trader or operating through a limited company.
Both structures have advantages and disadvantages. The right choice depends on your income level, the type of work you do, your appetite for admin, and how you prefer to manage tax.
This guide breaks down:
- the tax differences
- the responsibilities of each structure
- how take-home pay compares
- when it makes sense to incorporate
- and common myths to avoid
If you’re currently a sole trader looking for support with Self Assessment, QTax can help you file your tax return quickly and easily. See how it works in the Product Tour.
Sole Trader vs Limited Company: At a Glance
| Factor | Sole Trader | Limited Company |
|---|---|---|
| Setup time | Very quick | Slightly more involved |
| Admin load | Low | Higher (accounts, filings, payroll) |
| Tax complexity | Simple | More complex |
| Privacy | Low (your name appears on HMRC records) | Higher (company name acts as a buffer) |
| Profit extraction | All profit taxed as income | Mix of salary + dividends |
| Liability | Personal liability | Limited liability |
| Best suited to | Most sole traders and early-stage businesses | Higher earners, those needing liability protection |
Tax Differences Between Sole Traders and Limited Companies
Sole Traders: Income Tax + National Insurance
Sole traders pay:
- Income Tax on taxable profit
- Class 2 National Insurance
- Class 4 National Insurance
Your tax is based on:
Taxable profit = Income − Allowable expenses
The more expenses you can legitimately claim, the lower your tax bill will be.
Our Allowable Expenses Guide covers this in detail.
Limited Companies: Corporation Tax + Dividends
A limited company pays:
- Corporation Tax on company profits
- You then take money out as:
- salary (PAYE)
- dividends (taxed separately)
This structure becomes tax-efficient at higher income levels because:
- dividends are taxed at lower rates than income
- only the company pays Corporation Tax, not you personally
- there are opportunities for longer-term tax planning
But with these benefits come more admin requirements.
Admin & Legal Responsibilities
Sole traders
- Complete an annual Self Assessment
- Keep basic financial records
- Register for VAT only if you exceed the threshold
- No requirement for formal accounts or payroll
Simplicity is the key advantage here.
Limited companies
You must:
- File annual accounts
- File a confirmation statement
- Run payroll if you pay yourself a salary
- Maintain detailed accounting records
- File a corporation tax return
This adds time, complexity, and often accountant fees.
Which Option Gives You More Take-Home Pay?
Under ~£30,000 profit
For many sole traders earning under ~£30,000 per year:
- The tax savings of a limited company are small
- The admin burden often outweighs the benefit
Remaining as a sole trader is usually simpler and more cost-effective.
£30,000–£50,000 profit
This is the “grey area”.
At this level, incorporating may start to offer tax savings, but it depends on:
- business stability
- admin comfort levels
- how you extract earnings
- whether you plan to grow or hire
Some people incorporate too early — costing more in admin than they save in tax.
£50,000+ profit
At this stage, the limited company structure often becomes more tax-efficient due to:
- lower dividend tax rates
- flexibility in timing payments
- potential to minimise National Insurance
For higher earners, incorporation is often beneficial — provided you’re prepared for the additional admin.
Which Structure Is Best for You?
Here’s the simplest way to think about it:
Choose sole trader if you want:
- the simplest setup
- minimal admin
- quick tax filing
- low cost
- flexibility
- no need for payroll or formal accounts
Choose limited company if:
- you earn consistently above £50,000
- you want more control over your take-home pay
- liability protection is important
- your clients expect or require a company structure
- you are comfortable with more admin
Common Myths About Sole Traders vs Limited Companies
Myth 1 — “A limited company always pays less tax.”
Not always.
At lower income levels, tax savings may be minimal — while admin costs rise.
Myth 2 — “Clients won’t hire sole traders.”
Untrue in most industries. Many tradespeople, creatives and contractors work as sole traders.
Myth 3 — “It’s hard to switch later.”
Switching from sole trader to limited company is straightforward.
Many people start as sole traders and incorporate when earnings rise.
Where QTax Fits In
QTax is designed specifically for sole traders, helping you:
✔ File your Self Assessment quickly and easily
Our guided process simplifies every step.
✔ Understand what expenses you can claim
Avoid paying more tax than needed.
✔ Avoid mistakes
Smart prompts flag inconsistencies and missing info.
✔ Submit directly to HMRC
QTax is fully recognised for MTD-compatible digital tax filing.
See how the process works in the Product Tour.
Coming Soon: Support for One-Person Limited Companies
QTax is expanding rapidly, and support for one-person limited companies is coming soon.
This will include:
- simple tools to manage salary + dividends
- Corporation Tax filing
- expense and income guidance
- straightforward workflows designed for micro-companies
The goal:
Bring the same simplicity QTax offers sole traders to company directors.
Stay updated via our blog or explore our Pricing page for the current offering.
Conclusion
Choosing between being a sole trader or running a limited company depends on your income, goals, and appetite for admin. Sole traders benefit from simplicity and flexibility, while limited companies can offer tax advantages at higher income levels — with more administrative responsibilities.
Whichever structure you choose, QTax is here to support you.
Sole traders can file their Self Assessment in minutes today, and company directors will soon be able to enjoy the same simplicity.
Ready to file your Self Assessment the easy way?
Start your 30-day free trial with QTax.