Sole Trader vs Limited Company for Trades 2026
Tax rates, NI savings, and the £50k profit threshold where incorporation finally saves you money.
The reality:
Most trades incorporate too early and waste £1,200/year on accountant fees. Limited company only beats sole trader when profit exceeds ~£50k.
⚠️ Not Tax or Accounting Advice
This guide is for informational purposes only and does not constitute tax advice, accounting advice, or professional financial services. Tax laws, allowances, and HMRC requirements change frequently.
Before making any tax decisions or filing returns: Consult a qualified accountant or tax advisor who can review your specific circumstances. What's mentioned here may not apply to your situation, and regulations may have changed since publication.
Official source: HMRC (gov.uk/hmrc)
Quick Comparison
| Factor | Sole trader | Limited company |
|---|---|---|
| Setup cost | £0 (HMRC registration) | £12–£100 (Companies House) |
| Annual accountant fees | £300–£600 | £1,200–£2,000 |
| Tax rate (£30k profit) | 29% effective | 26% effective |
| Tax rate (£60k profit) | 38% effective | 28% effective |
| Admin time/year | 20–30 hours | 40–60 hours |
| Liability | Personal liability | Limited liability (with caveats) |
| Banking | Can use personal (not recommended) | Business account mandatory |
| Profit extraction | Automatic draw | Salary + dividends |
Tax Breakdown by Profit Level
£30k Profit Example
Sole trader
- Profit£30,000
- Personal allowance-£12,570
- Taxable income£17,430
- Income tax (20%)-£3,486
- Class 2 NI-£179
- Class 4 NI (9%)-£2,337
Limited company
- Profit£30,000
- Salary-£12,570
- Corporation tax (19%)-£3,312
- Dividends£14,118
- Dividend tax-£1,235
Winner: limited company saves £455, but subtract ~£1,200 accountant fees → sole trader still better at £30k.
£60k Profit Example
Sole trader
Take-home: £41,127 (31.5% effective tax)
Limited company
Take-home: £44,240 (26.3% effective tax)
Tax Savings vs Accountant Fees
Limited company only wins when tax savings exceed extra admin costs.
Break-even calculation:
Accountant cost premium ≈ £1,200/year. Limited company must save >£1,200 in tax to make sense.
Pros & Cons
Sole trader
- Simple bookkeeping + cheap accountants
- Personal control of profits
- Lower admin + fewer filings
- Personal liability for business debts
Limited company
- Lower taxes at higher profits
- More professional image for commercial contracts
- Limited liability (with director guarantees caveat)
- Complex admin + more HMRC filings
Decision Framework
- 1. Are you consistently generating £50k+ profit? If no → stay sole trader.
- 2. Do you need limited liability for commercial contracts? If yes → consider LTD.
- 3. Can you afford £100/month extra accounting cost? If no → wait.
- 4. Are you reinvesting profits? LTD allows retained earnings at 19% corporation tax.
When & How to Switch
- Switch at the end of a tax year to simplify bookkeeping.
- Open a new business bank account in the LTD.
- Transfer assets (vans, tools) at market value; claim capital allowances.
- Cancel sole trader PAYE registration once LTD payroll is ready.
Bottom Line
Stay sole trader until profit >£50k and commercial contracts demand incorporation. Limited company unlocks tax savings only when you can extract profits efficiently and afford the admin overhead.
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