Sole Trader vs Limited Company: Which Structure Saves You Tax?

It is one of the first questions every UK freelancer asks, and the internet is full of glib answers. The truth is that the right structure depends on your profit level, your appetite for admin, and how much personal risk your work carries.

How each structure is taxed

As a sole trader, all your business profit is your personal income. You pay income tax at 20%, 40% or 45% depending on your total income, plus Class 4 National Insurance on profits above the personal allowance.

A limited company pays Corporation Tax of 19% to 25% on its profits. You then pay personal tax on whatever you extract — salary through PAYE, dividends, or both. Profits left in the company are taxed only at the corporate rate, which is where the planning opportunity lives.

Where the crossover roughly sits

Below roughly £25,000 to £30,000 of annual profit, the sole trader route is usually simpler and no more expensive. Above that, incorporation often starts to save tax — particularly if you do not need to extract every pound you earn. The exact crossover moves every time rates or allowances change, so treat any fixed figure you read online with suspicion.

Liability: the non-tax reason to incorporate

A sole trader and their business are legally the same person. If the business is sued or cannot pay its debts, your personal assets — including your home — are exposed. A limited company is a separate legal entity: your liability is generally limited to what you have invested. For businesses with contracts, employees or premises, that protection alone can justify incorporating.

The admin burden, honestly assessed

• Sole trader: one Self Assessment return a year, simple records, and (from 2026) MTD quarterly updates.
• Limited company: annual accounts filed at Companies House, a Corporation Tax return, a confirmation statement, PAYE if you take a salary, and director responsibilities under company law.
• Most company directors pay an accountant a monthly fee; many sole traders manage alone. Build that cost into your comparison.

Other factors that tip the balance

• Credibility: some clients and contracts prefer or require a limited company.
• Pensions: companies can make employer pension contributions, which are usually deductible for Corporation Tax.
• Selling up: shares in a company can be sold; a sole trader business is harder to transfer.
• Privacy: company accounts are public at Companies House; sole trader finances stay private.