Sole trader vs limited company: which should I choose?

Start as a sole trader if you are testing an idea: you can trade straight away, you only have to register for Self Assessment once you earn more than £1,000 from self-employment in a tax year, and you are personally responsible for all business debts. Choose a limited company if you want limited liability instead — you must register it before you trade (£100 online) and file a yearly confirmation statement (£50 online) (GOV.UK, checked 2 October 2026).

This guide is for anyone in the UK deciding how to make a new business legal. Self Assessment is the yearly tax return where you report income HMRC does not already know about. A limited company is a separate legal entity registered at Companies House (the UK registrar that keeps company records). Both routes are simple to set up. The difference is in liability, tax, cost and the admin you take on every year.

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

A sole trader is you, trading under your own name or a business name — there is no separate legal entity, and you are personally responsible for all business debts. A limited company is its own legal entity, so the owners are responsible for its debts only up to their investment — that is what limited liability means (GOV.UK, checked 2 October 2026). A sole trader keeps records from the day they start trading and reports profit through Self Assessment. A limited company must be registered before it trades, then files company accounts, a company tax return and a yearly confirmation statement (a short update confirming the company's details are correct).

Who is responsible for business debts in each structure?

With a sole trader it is you: GOV.UK describes sole trader liability as unlimited, meaning you are personally responsible for all business debts (GOV.UK, checked 2 October 2026). With a limited company, liability is limited — owners are responsible for debts only up to their investment (GOV.UK, checked 2 October 2026). That one difference is the main reason people accept the extra admin of a company. It suits businesses that hold stock, employ staff, sign contracts or do work where something could go badly wrong.

How does tax work for a sole trader?

You keep all your profits after tax, and you pay Income Tax and National Insurance through Self Assessment (GOV.UK, checked 2 October 2026). For 2026–27 in England, the Personal Allowance covers income up to £12,570 at 0%, the basic rate is 20% from £12,571 to £50,270, the higher rate is 40% from £50,271 to £125,140, and the additional rate is 45% above £125,140 — bands differ in Scotland (GOV.UK, checked 2 October 2026). National Insurance for 2026–27 is Class 4 at 6% on profits between £12,570 and £50,270, then 2% above £50,270. Class 2 is treated as paid once profits are above £7,105, and is £3.65 a week if you pay it voluntarily below that (GOV.UK, checked 2 October 2026).

How does tax work for a limited company?

The company pays Corporation Tax (the tax a company pays on its profits) on what it earns. The small profits rate is 19% on profits of £50,000 or less, the main rate is 25% above £250,000, and marginal relief applies in between. Those rates have applied since 1 April 2023 (GOV.UK, checked 2 October 2026). On top of that, directors (the people who run the company) pay Income Tax on whatever they take out of the business. So a company is not automatically cheaper — you are comparing two different systems on your own numbers.

What does each one cost to set up and run?

A limited company costs £100 to register online by card, and it is usually registered within 24 hours. By post it is £124 with a cheque payable to "Companies House", and takes 8 to 10 days (GOV.UK, checked 2 October 2026). Every year after that you file a confirmation statement at £50 online or £110 on paper, and changing the company name costs £20 online or £30 on paper (Companies House fees, updated 25 September 2026). For a sole trader, no fee is stated on GOV.UK's sole trader or Self Assessment registration pages (checked 2 October 2026). Separately, VAT (a tax added to most goods and services) applies whichever structure you pick: you must register if your taxable turnover goes over £90,000 in the last 12 months, or if you expect it to go over £90,000 in the next 30 days alone (GOV.UK, checked 2 October 2026).

How much admin does each one need each year?

A sole trader keeps records from when they start trading and files one tax return a year. A limited company files company accounts, a company tax return and a yearly confirmation statement at £50 online or £110 on paper (GOV.UK, checked 2 October 2026). There is also identity verification: every director needs their own Companies House personal code, obtained by verifying identity through GOV.UK One Login (GOV.UK, checked 2 October 2026). It is more admin, but it is predictable — and you can diary all of it.

Which should I choose if I'm starting a side business?

If you are testing an idea alongside a job, the sole trader route is the lighter one: you can start trading straight away and only need to register for Self Assessment if you earn more than £1,000 from self-employment in a tax year (GOV.UK, checked 2 October 2026). If your work carries a real risk of debts or claims, or your expected profits are high enough that the Corporation Tax rates above look better than Income Tax plus National Insurance, look at a limited company instead. Run the numbers on your own expected profit, then talk your plan through with an accountant before you register.

Do I have to choose one now, or can I switch later?

You do not have to decide for ever. You can register a limited company at any point if liability or tax starts to matter more — it just has to be registered before it starts trading, at £100 online (GOV.UK, checked 2 October 2026). If you stay a sole trader, the deadline to register is 5 October after the end of the tax year you need to report — 5 October 2026 for the 2025–26 tax year — and registering later can mean a penalty (GOV.UK, checked 2 October 2026).

Step by step

Write down what you expect to earn in your first year. If your gross trading income is £1,000 or less in a tax year (6 April to 5 April), you do not need to tell HMRC, unless you have to register for other reasons (GOV.UK, checked 2 October 2026).
Weigh up the risk in your work. Start from the liability difference: unlimited as a sole trader, limited to your investment as a company (GOV.UK, checked 2 October 2026).
If you go sole trader, register for Self Assessment at gov.uk/register-for-self-assessment. No fee is stated on GOV.UK's sole trader or Self Assessment registration pages (checked 2 October 2026). Do it by 5 October after the end of the tax year — 5 October 2026 for 2025–26.
Watch for your UTR. A Unique Taxpayer Reference (the number HMRC uses to identify you) usually arrives by post around 15 days after you register, and longer if you live overseas (GOV.UK, checked 2 October 2026).
If you go limited, gather everything first: company name, registered office address, at least one director, shareholder(s) or guarantor(s), people with significant control (PSC — anyone who owns or controls a large share of the company), articles and memorandum of association, statement of capital, and a SIC code (the code that describes what the company does). Each director needs their own Companies House personal code from verifying identity through GOV.UK One Login (GOV.UK, checked 2 October 2026).
Register the company online at gov.uk/limited-company-formation/register-your-company. It costs £100 by card and usually takes under 24 hours; by post it is £124 and takes 8 to 10 days (GOV.UK, checked 2 October 2026).
After registering, get your company UTR and add Corporation Tax to the business tax account (GOV.UK, checked 2 October 2026).
Diary the yearly jobs. A confirmation statement at £50 online or £110 on paper, and a VAT check against the £90,000 threshold (GOV.UK and Companies House fees, checked 2 October 2026).

AI shortcut: Ask an AI assistant to turn your own numbers into a one-page admin calendar. Never ask it to tell you which structure to choose or how much tax you will pay — those are decisions for you and an accountant.

You are organising information for me. Do not give tax, legal or financial advice, and do not tell me which business structure to choose.

My situation: I am starting [what you do] in the UK. I expect my gross income in year one to be about £[amount]. I work alone, I have no employees, and I [do / do not] have savings to cover a bad month. My main worry is [worry].

Using only the GOV.UK facts I paste below, produce:
1. A one-page checklist of what I must do before I start trading, in order.
2. A calendar of the yearly deadlines I should diary.
3. Five questions about my own figures that I should take to an accountant.

Facts: [paste the GOV.UK pages or figures you have collected]

Common mistakes

Registering a limited company "just in case", then paying £50 online for a confirmation statement every year before the business earns anything (Companies House fees, updated 25 September 2026).
Assuming a company protects you from every debt — liability is limited to your investment, but the company still has its own bills and legal duties (GOV.UK, checked 2 October 2026).
Forgetting that directors pay Income Tax on what they take out of a company, on top of the Corporation Tax the company pays.
Missing the 5 October deadline to register for Self Assessment. Registering late can lead to a failure-to-notify penalty if the bill is still unpaid by 31 January (GOV.UK, checked 2 October 2026).
Treating the £1,000 trading allowance (up to £1,000 a year of trading income that is tax-free) as an extra deduction — above £1,000 of gross income you can deduct the £1,000 instead of your expenses, not as well as them (GOV.UK, checked 2 October 2026).

FAQs

Do I need to register as a sole trader if I earn under £1,000?

If your gross trading income is £1,000 or less in a tax year you do not need to tell HMRC, unless you have to register for other reasons. The £1,000 figure is the trading allowance, which covers self-employment and casual services (GOV.UK, checked 2 October 2026). Above it, you must tell HMRC.

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

£100 to register online by card, usually within 24 hours, or £124 by post with a cheque to "Companies House", which takes 8 to 10 days (GOV.UK, checked 2 October 2026). After that, a confirmation statement costs £50 online or £110 on paper each year (Companies House fees, updated 25 September 2026).

When is the deadline to register as a sole trader?

By 5 October after the end of the tax year you need to report — 5 October 2026 for the 2025–26 tax year (GOV.UK, checked 2 October 2026). Registering later can lead to a penalty.

What happens if I register or file late?

Late tax returns start with a £100 penalty, then £10 a day after three months up to £900, with further charges at 6 and 12 months of 5% of the tax due or £300, whichever is greater (GOV.UK, checked 2 October 2026). Paying late adds 5% of the unpaid tax at 30 days, 6 months and 12 months, plus interest.

What is a UTR and when does it arrive?

A Unique Taxpayer Reference is the number HMRC uses to identify you. It usually arrives by post around 15 days after you register, and longer if you live overseas (GOV.UK, checked 2 October 2026).

Do I need to register for VAT?

You must register once your taxable turnover goes over £90,000 in the last 12 months, and you must do it within 30 days of the end of the month you went over — or if you expect to go over £90,000 in the next 30 days alone (GOV.UK, checked 2 October 2026). You can register voluntarily below £90,000. The same threshold applies to sole traders and companies.

Can I be a sole trader and run a limited company at the same time?

You can, but each has its own duties. A company must be registered before it trades and files a yearly confirmation statement at £50 online (GOV.UK, checked 2 October 2026), while sole trader income over £1,000 has to be reported through Self Assessment. Ask an accountant how to keep the two sets of records separate.

What to do next

If you have decided to go it alone, How do I register as a sole trader? walks through the registration step by step. If limited liability matters more to you, start with How do I set up a limited company in the UK?. Still deciding what the business will actually be? Browse our business ideas for something you can start this month.

Information, not tax, legal or financial advice. Figures checked against GOV.UK on 2 October 2026.

Last updated 2 October 2026

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