Small business
Sole trader or limited company: which saves you more?
Going limited can save you tax — but it isn't automatic, and for some businesses it costs more than it saves. The honest answer depends on your profit level, how much you need to draw, and how much admin you'll tolerate. Here's how to think it through properly.
The basic difference
As a sole trader, you and the business are the same thing: profits are yours and taxed through self assessment. A limited company is a separate legal entity: it pays corporation tax on profits, and you take money out as salary, dividends, or both — each taxed differently.
Where the saving comes from
The tax advantage of a company comes from the gap between income tax plus National Insurance on the one hand, and corporation tax plus dividend tax on the other — and from timing: a company lets you leave profit inside the business in good years rather than paying top-rate tax on money you didn't need to draw. The exact crossover point moves whenever rates and allowances change, which is why generic "go limited at £X" rules age badly. We model it on your actual numbers with current rates.
What going limited costs you
More admin: statutory accounts, a confirmation statement, corporation tax returns, payroll if you take a salary, and dividend paperwork. Less privacy: your accounts are on public record at Companies House. And more discipline: the company's money is not your money — mixing them causes genuine problems.
Beyond tax: the other reasons
Limited liability protects your personal assets if things go wrong. Some contracts and customers simply expect a limited company. And a company can look more established when you're bidding for work. Sometimes these outweigh the tax question entirely.
The honest rule of thumb
If your profits are modest and you draw everything you earn, staying a sole trader is often simpler and no worse off. As profits grow beyond what you need to live on, incorporation usually starts to pay. The switch is easy to get wrong and hard to reverse — so run the numbers before you leap. That's a 30-minute exercise for us, and we'll tell you straight if staying put is the better answer.
This is general information, not advice for your circumstances. If you'd like it applied to your situation, get in touch — the first chat is free.
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