Sole trader or limited company: how to decide

Most people start as sole traders because it's simple. A limited company can mean paying less tax as profits grow, but it comes with costs and responsibilities. Here's what to weigh up.

How you're taxed

As a sole trader, you pay income tax and Class 4 National Insurance on all your profit, whether you take the money out or not.

Through a company, the company pays corporation tax on its profit: 19% on profits up to £50,000, rising to 25% above £250,000, with marginal relief in between. You then pay yourself a salary and dividends. Dividends have their own rates and a £500 tax-free allowance.

Costs and paperwork

• Company accounts and a confirmation statement every year at Companies House.
• A company tax return, and usually payroll for your salary.
• Higher accountancy fees than for a sole trader.
• The company's money isn't yours. You take it out as salary, dividends or expenses, by the rules.

Other differences

• Liability: a company is a separate legal person, which can limit your personal risk.
• Privacy: company details, including directors, are public on Companies House.
• Leaving money in: a company can keep profit for later years, taxed only at corporation tax rates until you take it out.

Run your own numbers

The sole trader vs limited company calculator compares your take-home pay under each. An accountant can then look at costs, pensions and your plans before you switch.