If you are deciding whether to incorporate, how to pay yourself, and how to stay compliant as a director, start with the Limited Company Hub.
Setting up a limited company can save thousands in tax, but it isn’t right for everyone. Here’s how to compare and decide.
Sole Trader vs Limited Company — Quick Comparison
| Feature | Sole Trader | Limited Company |
|---|---|---|
| Legal status | You and the business are one entity | Separate legal entity |
| Liability | Unlimited personal liability | Limited to company assets |
| Tax on profits | Income tax (20-45%) + NI | Corporation tax (19-25%) |
| How you extract money | It’s all your money | Salary + dividends |
| Accounts | Simple records, self-assessment | Full accounts, Companies House filing |
| Accountancy costs | £200-£500/year | £800-£2,500/year |
| Privacy | Your name only | Directors/shareholders on public register |
| Set up cost | Free (just register for self-assessment) | £12 (Companies House) |
| Credibility | Lower perceived | Higher perceived |
The Tax Comparison
This is the main reason people consider a limited company.
Sole Trader Tax (2025/26)
All profit is taxed as personal income:
| Profit level | Income tax | Class 2 NI | Class 4 NI | Total tax | Effective rate |
|---|---|---|---|---|---|
| £20,000 | £1,486 | £179 | £659 | £2,324 | 11.6% |
| £30,000 | £3,486 | £179 | £1,559 | £5,224 | 17.4% |
| £40,000 | £5,486 | £179 | £2,459 | £8,124 | 20.3% |
| £50,000 | £7,486 | £179 | £3,359 | £11,024 | 22.0% |
| £60,000 | £11,432 | £179 | £3,659 | £15,270 | 25.5% |
| £80,000 | £19,432 | £179 | £4,259 | £23,870 | 29.8% |
| £100,000 | £27,432 | £179 | £4,859 | £32,470 | 32.5% |
Limited Company Tax (Salary + Dividends Strategy)
Typical strategy: pay yourself a salary up to the NI threshold (~£12,570), take the rest as dividends:
| Profit level | Corporation tax | Dividend tax | Employer NI | Total tax | Effective rate | Annual saving vs sole trader |
|---|---|---|---|---|---|---|
| £20,000 | £1,411 | £0 | £0 | £1,411 | 7.1% | £913 |
| £30,000 | £3,311 | £300 | £0 | £3,611 | 12.0% | £1,613 |
| £40,000 | £5,211 | £1,143 | £0 | £6,354 | 15.9% | £1,770 |
| £50,000 | £7,111 | £1,931 | £0 | £9,042 | 18.1% | £1,982 |
| £60,000 | £11,875 | £2,094 | £0 | £13,969 | 23.3% | £1,301 |
| £80,000 | £16,875 | £5,044 | £0 | £21,919 | 27.4% | £1,951 |
| £100,000 | £21,875 | £7,994 | £0 | £29,869 | 29.9% | £2,601 |
Simplified illustration — actual figures depend on dividend allowance usage, other income, and specific salary levels.
The Break-Even Point
| Factor | Detail |
|---|---|
| Tax savings start | Around £25,000-£30,000 profit |
| Extra admin costs | £600-£2,000/year |
| Clear benefit starts | Around £30,000-£50,000 profit |
Below £30,000, the accountancy costs often eat the tax savings.
When to Set Up a Limited Company
| Situation | Ltd recommended? |
|---|---|
| Profits consistently above £40,000 | Yes — clear tax savings |
| Contractor or freelancer (IR35 permitting) | Usually yes |
| Want limited liability protection | Yes |
| Want business credibility | Yes |
| Planning to bring on investors or partners | Yes |
| Want to leave profits in the business | Yes (only 19-25% corp tax) |
When to Stay as a Sole Trader
| Situation | Stay sole trader |
|---|---|
| Profits under £30,000 | Tax savings minimal or negative after costs |
| Simple business, few transactions | Admin not worth the hassle |
| Don’t want public accounts | Ltd accounts are visible on Companies House |
| Side hustle alongside employment | Usually simpler as sole trader |
| Short-term or temporary work | Not worth the setup |
The Admin Burden of a Limited Company
| Requirement | Frequency | Sole trader equivalent |
|---|---|---|
| Annual accounts to Companies House | Yearly | Not required |
| Corporation tax return (CT600) | Yearly | Self-assessment only |
| Confirmation statement | Yearly (£13) | Not required |
| PAYE/payroll | Monthly | Not required |
| VAT returns (if VAT registered) | Quarterly | Same |
| Self-assessment (for dividends) | Yearly | Yearly (for all income) |
| Director’s responsibilities | Ongoing | None |
How to Set Up a Limited Company
| Step | Detail | Cost |
|---|---|---|
| 1. Register with Companies House | Online at gov.uk | £12 |
| 2. Choose company name | Must be unique, check availability | Free |
| 3. Register for Corporation Tax | Within 3 months of starting to trade | Free |
| 4. Open business bank account | Required for company finances | Free-£15/month |
| 5. Set up payroll | For your salary (even if just director) | £0-£500/year |
| 6. Get an accountant | Essential for Ltd companies | £800-£2,500/year |
IR35 Warning for Contractors
If you work through a limited company but HMRC considers you a disguised employee, IR35 rules mean:
- Tax is calculated as if you were employed
- No dividend tax advantage
- Client may be responsible for deducting tax
Before setting up a company for contracting, check your IR35 status using HMRC’s CEST tool.
Related Guides
- Dividend vs Salary Calculator — optimise your extraction
- Self-Employment Tax Guide — sole trader obligations
- Corporation Tax Guide — company tax rates and rules
- Salary Sacrifice Guide — employed alternatives