It’s one of the most common questions we’re asked, and there’s no single right answer — it depends on your profits, your plans and your appetite for admin. Here’s an honest comparison to help you think it through.
Sole trader: simple and private
As a sole trader, you and the business are the same legal entity. You keep things simple: register with HMRC, file a Self Assessment return, and pay income tax and Class 4 National Insurance on your profits. There’s very little public paperwork, and your affairs stay private. The downsides are that there’s no legal separation between you and the business — so you’re personally liable for its debts — and that, beyond a certain level of profit, you may pay more tax than you would through a company.
Limited company: separation and potential tax efficiency
A limited company is a separate legal entity. That gives you limited liability — your personal assets are generally protected — and can look more credible to larger clients. On profits, the company pays corporation tax at 19% up to £50,000, with marginal relief up to £250,000 and 25% above that. You then take money out as a mix of salary and dividends, which can be efficient — though this is less clear-cut than it used to be. Dividend tax rates rose on 6 April 2026 to 10.75% for basic-rate and 35.75% for higher-rate taxpayers, and the tax-free dividend allowance is just £500.
The trade-off is more administration: annual accounts and a corporation tax return, Companies House filings, director’s responsibilities, and information about the company on the public record.
So which is better?
As a rough guide, incorporation tends to become worth considering as profits grow and as limited liability or outside credibility matter more — but the dividend changes mean the sums need doing carefully for your own situation. The right answer also depends on whether you plan to reinvest profits, take on staff, or eventually sell.
This is a decision worth getting right from the start, because changing later has its own tax consequences. We’ll run the numbers for your circumstances and give you a clear recommendation — see (our accounting services) or (get in touch).