What is the difference between a limited company and a sole trader?

A limited company is a separate legal entity — your personal assets are protected from business debts (limited liability). A sole trader and the business are legally the same — you are personally liable for all debts. Limited companies pay Corporation Tax (25%) on profits and can be more tax-efficient at higher earnings through dividend distribution.

How much does it cost to set up a limited company?

Registering a limited company with Companies House costs £12 online or £50 by post. You can use a formation agent for £15-£100 which handles the paperwork. Ongoing costs include an accountant (£500-£2,000/year), annual accounts filing, and confirmation statement (£13/year). Total first-year costs are typically £500-£2,000.

When should I switch from sole trader to limited company?

Generally, trading through a limited company becomes more tax-efficient when profits exceed approximately £30,000-£50,000/year. At this level, the combination of a small salary plus dividends usually results in less tax than sole trader income tax and National Insurance. Other factors include liability protection and professional credibility.

Limited Company Guide UK — How to Set Up and Run a Limited Company | PocketWise

Setting up a limited company is one of the most important decisions for UK business owners and self-employed professionals. It offers tax efficiency, limited liability, and professional credibility — but comes with additional responsibilities.

Types of Limited Company

Type	Description	Best For
Private limited by shares (Ltd)	Most common; shareholders own the company	Most businesses and freelancers
Private limited by guarantee	Members guarantee a set amount	Non-profits, clubs, community organisations
Public limited company (PLC)	Can sell shares to the public	Large companies (not usually relevant here)
LLP (Limited Liability Partnership)	Partnership with limited liability	Partnerships (e.g., two or more professionals)

Setting Up

Steps to Register

Step	Action	Cost
1	Choose a company name	Free
2	Register with Companies House	£12 online / £50 post
3	Appoint directors (minimum 1)	Free
4	Issue shares	Free
5	Registered office address	Free (can be your home)
6	Memorandum and Articles of Association	Standard template is free
7	Register for Corporation Tax (within 3 months of trading)	Free
8	Open a business bank account	Free–£10/month
9	Register for VAT (if turnover will exceed £90,000)	Free

What You Need

Requirement	Detail
Company name	Must be unique (check Companies House register)
Registered office	UK address for official correspondence
Director	At least one (must be aged 16+)
Person with Significant Control (PSC)	Anyone controlling 25%+ of shares or voting rights
SIC code	Standard Industrial Classification code for your business activity
Share structure	At least 1 share (typically 100 ordinary shares at £1 each)

Director’s Responsibilities

Duty	Detail
File annual accounts	Within 9 months of year end
File confirmation statement	At least annually (£13)
File Corporation Tax return	Within 12 months of year end
Pay Corporation Tax	Within 9 months and 1 day of year end
Maintain statutory registers	Members, directors, PSCs
Keep accounting records	6 years minimum
Act in company’s best interests	Fiduciary duty

Tax Structure

Tax	Rate (2025/26)	When It Applies
Corporation Tax	25% (19% for profits under £50,000)	On company profits
Marginal relief	Effective rate 19–25%	Profits £50,000–£250,000
Dividend tax	0% (£500 allowance), then 8.75%/33.75%/39.35%	When you take dividends
Income tax on salary	Standard PAYE rates	On any salary drawn
Employer’s NI	15% above £5,000 threshold	On salary above threshold
VAT	20% (standard)	If VAT registered

Optimal Salary and Dividend Strategy

Component	Amount (Typical 2025/26)	Why
Salary	£12,570 (Personal Allowance)	Tax-free, but NI applies above £5,000
OR Salary	£5,000 (NI threshold)	Minimises Employer’s NI
Dividends	Remaining profit after Corporation Tax	Lower tax rates than salary

Tax Comparison: Sole Trader vs Limited Company

Profit Level	Sole Trader Tax + NI	Ltd Company Tax (salary + dividends)	Saving
£30,000	~£5,800	~£4,500	~£1,300
£50,000	~£12,000	~£9,500	~£2,500
£75,000	~£20,500	~£16,000	~£4,500
£100,000	~£29,500	~£24,000	~£5,500

Approximate figures — actual savings depend on individual circumstances.

Advantages and Disadvantages

Advantages	Disadvantages
Limited liability protection	More admin and compliance
Tax-efficient (salary + dividends)	Filing requirements (accounts, CT return)
Professional credibility	Accounts are public record
Can retain profits in the company	Need an accountant (practically)
Easier to bring in investors/partners	Directors’ legal responsibilities
Pension contributions are tax-deductible business expense	IR35 rules for contractors

Running Costs

Cost	Typical Amount
Companies House confirmation statement	£13/year
Accountant	£500–£2,000/year
Business bank account	£0–£15/month
Accounting software	£10–£35/month
Professional indemnity insurance	£100–£500/year
Registered office (if using a service)	£50–£200/year

Key Dates

Deadline	What
3 months after trading starts	Register for Corporation Tax
9 months after year end	File annual accounts with Companies House
12 months after year end	File Corporation Tax return with HMRC
9 months + 1 day after year end	Pay Corporation Tax
Within 14 days of quarter end	Pay PAYE/NI (if payroll)
Annually	File confirmation statement

For more on registering as self-employed, the sole trader alternative, or IR35 rules, see our dedicated guides.