Key takeaways
- As a sole trader, you pay Income Tax on all your profit and you are personally liable for the business — simplicity at the cost of protection.
- A limited company pays 19% Corporation Tax on profits up to £50,000, keeps its own legal identity, and separates your personal assets from business debts.
- Companies pay 25% Corporation Tax on profits above £250,000.
- Above roughly £30,000–£50,000 of profit, the company structure often wins on tax — but it needs more admin and costs money to maintain.
- You can switch later. Most freelancers start as sole traders and incorporate when the numbers justify it.
How the two structures actually differ
A sole trader is the business. Your name is the trading name, your tax affairs are run through Self Assessment, and there is no legal wall between you and the company's debts. A limited company is its own legal person: it can own assets, sign contracts and owe money under its own name, and you are a director and shareholder rather than the business itself.
That one distinction drives every other difference you will see in the comparison below — liability, tax, how you invoice, and how much paperwork you take on.
Liability: the biggest difference
If a sole trader business cannot pay its bills, the owner personally owes that money — savings, house and all are exposed. A limited company is a separate entity, so directors' personal assets are generally protected if the company fails. That protection is the single most common reason people incorporate, especially in work with project risk, contracts or clients who pay late.
In practice, most freelancers never face debts they can't cover. But "never" is a long time — and the protection only exists if you keep the company's affairs properly separated from your own.
Tax: income tax and National Insurance vs Corporation Tax
A sole trader pays Income Tax on their taxable profit through Self Assessment. For 2026/27 the bands are: £12,570 tax-free (Personal Allowance), 20% up to £50,270, 40% up to £125,140, then 45%. On top of that, Class 4 National Insurance applies to self-employed profits.
A company pays 19% Corporation Tax on profits up to £50,000, 25% on profits above £250,000, with marginal relief in between. But that is not the whole story — when you take money out as a director, salary is subject to PAYE and dividends attract Dividend Tax. The crude rule of thumb: a company usually wins once profit stays reliably above roughly £30,000–£50,000, but your personal tax position decides it, so this is genuinely one to model in a spreadsheet.
Costs and admin: companies keep asking for time and money
Incorporating costs £50 with Companies House. After that, a company needs a Confirmation Statement each year, annual accounts filed with Companies House, Corporation Tax returns, and a payroll or dividend process. Small companies can keep this lean, but most use an accountant — typically a few hundred pounds a year even for simple structures.
A sole trader simply keeps invoices and expenses and completes one Self Assessment return a year. No filing fee, no annual accounts, no separate tax return.
Invoicing with each structure
Both structures can invoice under one name — but the details differ. A sole trader invoices under their own name (plus a trading name if they use one). A limited company must show the full registered company name, company number and registered office on invoices, and issue invoices in the company's name, not the director's.
That is exactly why we split our templates: the sole trader invoice template keeps it simple, while the limited company invoice template has the Companies Act 2006 fields built in.
You can switch later — most people do
Nothing here is permanent. The common path is to start as a sole trader (zero set-up cost, minimal admin), then incorporate once profit is consistently high enough that the tax saving outweighs the extra cost and admin. The reverse move is rarer but possible. If you are unsure, staying a sole trader for at least your first full year gives you a clean picture of what your profit actually looks like.
Sole trader vs limited company, side by side
- Legal identity: sole trader — you are the business; limited company — separate legal entity.
- Personal liability: sole trader — unlimited; limited company — limited to what you have invested.
- Tax on profit: sole trader — Income Tax 20%–45% plus Class 4 NIC; limited company — Corporation Tax 19% (£50k) / 25% (£250k+), then tax when you take money out.
- Set-up cost: sole trader — free (register for Self Assessment); limited company — £50 incorporation fee.
- Annual admin: sole trader — Self Assessment return only; limited company — Confirmation Statement, accounts, Corporation Tax return, payroll or dividends.
- Public record: sole trader — none; limited company — your name and details sit on the public Companies House register.
- Invoicing: sole trader — your name (+ trading name); limited company — registered company name, number and registered office.
Which one should you pick?
Stay a sole trader if you are earning under roughly £30,000 profit, you want the lowest-maintenance option, you don't mind the personal liability, and your clients don't demand a company. Choose a limited company if your profit is consistently high, you carry real project risk, you want the tax structure to have more options, or a client or contract requires corporate status.
And if your main worry right now is simpler than structure — like just getting a clean invoice out today — both templates are free:
Invoice under either structure today
Generate a compliant UK invoice in under a minute — free, no sign-up, no watermark.
Frequently asked questions
Which pays less tax: sole trader or limited company?
There is no universal answer. A company pays 19% Corporation Tax on profits up to £50,000, then 25% above £250,000. A sole trader pays Income Tax on all taxable profit, so at higher profit levels a company is usually more efficient — but directors then pay tax again on salary and dividends. The right answer depends on your profit and how much you take out each year.
Is a limited company safer than being a sole trader?
Yes, from a liability perspective. A company is a separate legal entity, so your personal assets are generally protected if the business cannot pay its debts. As a sole trader, you are personally liable for business debts without limit.
How much does it cost to set up a limited company?
Incorporating costs £50 with Companies House. Most people also need a registered office address and accounting help, which are the main ongoing costs.
Can I switch from sole trader to limited company later?
Yes. You can incorporate at any point as long as the same trade continues and you register for the new structure correctly. Many freelancers start as sole traders and switch once profits make it worthwhile.
Do I need a company to send professional invoices?
No. Freelancers and sole traders can invoice under their own name without forming a company. A limited company is about liability and tax efficiency, not invoice credibility.
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General guidance only — this is not legal, tax or accounting advice. Rates are for the 2026/27 tax year in England, Wales and Northern Ireland; Scotland has different Income Tax bands. Last reviewed 23 September 2026.