Tax Differences Between Sole Traders and Limited Companies
| Feature | Sole Trader | Limited Company |
|---|---|---|
| Setup | Register with HMRC (free) | Register with Companies House (£12 online) |
| Personal liability | Unlimited — you are the business | Limited to company assets |
| Tax on profits | Income Tax (20–45%) | Corporation Tax (19–25%) |
| National Insurance | Class 2 + Class 4 on all profits | Class 1 on salary only |
| Extracting profits | All profits are yours automatically | Via salary and/or dividends |
| Admin | Self Assessment only | Annual accounts, confirmation statement, payroll, SA |
| Privacy | Your details are private | Accounts and director details are public |
How Sole Traders Are Taxed
As a sole trader, your business profits are taxed as personal income, which you report to HMRC online:[1]
- Income Tax at 20%, 40%, or 45% depending on your total income
- Class 2 NI at £3.45/week
- Class 4 NI at 6% on profits between £12,570–£50,270, then 2% above
How Limited Companies Are Taxed
A limited company pays Corporation Tax on its profits:[4]
- 19% on profits up to £50,000 (small profits rate)
- 25% on profits over £250,000 (main rate)
- Marginal relief applies between £50,000 and £250,000
To get money out of the company, you typically take a combination of salary (taxed through PAYE) and dividends (taxed at lower dividend rates).[5]
National Insurance Differences
This is often the biggest factor:
- Sole trader: Class 2 + Class 4 NI on all profits
- Company director: Class 1 NI on salary only. No NI on dividends. Most director-shareholders take a low salary (around the NI threshold) and extract the rest as dividends.
Employer’s NI: Don’t forget the company also pays employer’s NI (15%) on the director’s salary above £5,000. This is deductible from Corporation Tax but still a real cost.
When a Company Makes Sense
- Your profits consistently exceed £30,000–£40,000+
- You want limited liability protection
- You have multiple shareholders or want to bring in investors
- You want to retain profits in the business for growth
When to Stay Sole Trader
- Your profits are under £30,000 (the admin costs may outweigh tax savings)
- You value simplicity and low admin
- You want to keep your business private
- You don’t need limited liability
Get advice. The right structure depends on your specific circumstances. An accountant can model both options with your actual figures.
Frequently Asked Questions
Is it better to be a sole trader or limited company for tax?
It depends on your profit level. A limited company often becomes more tax-efficient once profits consistently exceed £30,000–£40,000, thanks to lower Corporation Tax rates and the ability to take dividends instead of salary.
How much Corporation Tax does a limited company pay?
The small profits rate is 19% on profits up to £50,000 and the main rate is 25% on profits over £250,000, with marginal relief for profits in between.
Do limited company directors pay National Insurance on dividends?
No. National Insurance is only payable on salary, not dividends. Most director-shareholders take a low salary around the NI threshold and extract remaining profits as dividends.
What are the disadvantages of a limited company?
Limited companies have more administration including annual accounts, a confirmation statement, payroll, and corporation tax returns. Your accounts and director details are also publicly available at Companies House.
Further Reading
- How to Register as Self-Employed
- Dividend Income & the Dividend Allowance
- National Insurance for Self-Employed
- IR35 & Off-Payroll Working Rules
Looking for simple Income Tax MTD software?
#GoFile is HMRC-recognised and trusted by 50,000+ UK businesses. Set up in minutes, file with confidence.
Get Started For FreeNo credit card required · Cancel anytime
Sources
- Set up as a sole trader — GOV.UK
- Set up a limited company — GOV.UK
- Running a limited company — GOV.UK
- Corporation Tax — GOV.UK
- Tax on dividends — GOV.UK