Sole trader vs limited company: Which one could be better for you? (2025 Guide)

Most people in the UK start as sole traders. You register with HMRC, send invoices, and keep your profit after tax. The setup takes minutes and the admin stays light.

Then your income hits the £50,000 or £60,000 mark, and the questions start rolling in. Is a limited company really more tax-efficient? Is the liability protection worth the extra admin?

In this guide, we’ve broken down the sole trader vs limited company debate to show you what you'd pay under each structure and when switching might make sense.

We’ve also touched on the merits of using Wise Business, whether you’re a sole trader or a limited company, to simplify international payments, invoicing, accounting, and more.

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Table of contents

What’s the difference between a sole trader and a limited company? Example calculation: Tax on £50,000 revenue as a sole trader Example calculation: Tax on £50,000 revenue as a limited company What the example calculations mean for sole trader vs limited company The pros and cons of being a sole trader Pros of being a sole trader Cons of being a sole trader The pros and cons of being a limited company Pros of being a limited company Cons of being a limited company Which structure could be better for you? How to switch from a sole trader to a limited company Connect your business to the world with Wise Business FAQs What happens to my customers if I switch to a limited company? Can I be a sole trader and run a limited company at the same time? What are the differences in expenses between a sole trader and a limited company?

What’s the difference between a sole trader and a limited company?

Feature	Sole Trader 🧍	Limited Company 🏢
Legal Status	You and the business are one legal entity.	The business is a separate legal entity from you.
Liability	You are personally responsible for all business debts.	The company is responsible for its own debts (limited liability).
Setup and Admin	Simple; register for Self Assessment if income > £1,000.	Formal; must register with Companies House.
Main Tax	Income Tax and National Insurance on profits.	Corporation Tax on profits.

As a sole trader:

• You run the business as an individual
• You keep all profits after tax but are personally responsible for any debts or losses¹
• You can start the business without registering with HMRC, but if you earn more than £1,000 per tax year, you’ll need to register for a Self Assessment with HMRC and report your income each year²
• Class 2 contributions are no longer required if your profits are over £6,845, but you will still receive National Insurance credits
• Class 4 contributions apply to profits above £12,570 at 6%^3,4

As a limited company:

• Once you're registered with Companies House, the company becomes its own legal entity
• The company owns its assets, signs contracts, and is responsible for any debt
• You manage it as a director and pay tax through the company⁵
• Corporation Tax applies to profits⁶: 
  • 19% if profits are £50,000 or less
  • 25% if profits are over £250,000
  • A blended rate applies for anything in between

Note: VAT applies to both structures if your annual taxable turnover exceeds £90,000 or you expect it to be over £90,000 in the next 30 days⁷.

Example calculation: Tax on £50,000 revenue as a sole trader

If you’re earning £50,000 as a sole trader, then:

• Your first £12,570 is tax-free
• The rest of the £37,430 is taxed at 20% which comes to £7,486 Income Tax⁸
• You do not have to pay class 2 NI if your profit is greater than £6,845³
• Class 4 NI is charged at 6% on profits above £12,570, which comes to £2,246⁴

That adds up to £9,732 in total tax and NI, leaving you with a take-home pay of £40,268.

Example calculation: Tax on £50,000 revenue as a limited company

If your limited company makes a £50,000 profit and you take a £12,570 salary, then:

• A salary of £12,570 incurs an Employer's NI charge of £479. 
• The company's taxable profit is £36,951, and the Corporation Tax at 19% on this is £7,021⁶ 
• The remaining profit available to take as dividends is £29,930
• Your £12,570 salary is covered by your personal allowance, so there is no Income Tax or NI
• Your first £500 of dividends is tax-free⁹ 
• The remaining £29,430 is taxed at 8.75%, which comes to £2,575

That adds up to £10,075 in total tax (Employer's NI, Corporation Tax, and personal dividend tax), leaving you with a take-home pay of £39,925. 

What the example calculations mean for sole trader vs limited company

If you’re earning £50,000 per year, being a sole trader leaves you with about £340 more in your pocket as per the calculations above. 

The limited company advantage kicks in once you're earning closer to £60,000 to £70,000, where the gap between 20% Income Tax (plus NI) and the combination of 19% Corporation Tax plus dividend tax starts working in your favour.

Note that Tax figures are based on 2025/26 rates and assume no other income. Your actual tax depends on your personal circumstances.

Speak to an accountant for advice specific to your situation.

The pros and cons of being a sole trader

Pros ✅	Cons ❌
Start trading immediately with minimal paperwork.	Your personal assets are at risk if the business fails.
You have full control, and your business details stay private.	Tax rates can climb quickly as profits increase.
Keep all the after-tax profit for yourself.	It can be more difficult to secure business loans.
	Larger clients may prefer to work with limited companies.
	Business and personal finances can easily get mixed up.

Pros of being a sole trader

Simple to start: You can register online with HMRC as self-employed and begin trading the same day. There’s no need to set up a company or deal with Companies House paperwork.

Light on admin: Your bookkeeping is as simple as tracking income and expenses. You submit one tax return a year and pay Income Tax and National Insurance through Self Assessment.

You keep what you earn: After tax, the profit is yours. You don’t have to split it into salary and dividends.

Private business details: Nothing is published publicly. Limited company directors have their information listed on Companies House, but sole traders don’t.

Full control: Decisions are quick. You can change prices, swap customers, or stop trading without any formal process or legal filing.

Cons of being a sole trader

You’re personally liable: There's no legal separation between you and the business. If a customer sues you for £80,000 over a project dispute, or a supplier chases you for unpaid invoices, they can go after your house, car, and savings. Everything you own personally is on the table.

Tax can climb quickly: You pay tax on all your profits at the personal rates for the 2025/26 tax year⁸:- 0% on taxable income less than or equal to £12,570- 20% on taxable income between £12,571 and £50,270

• 40% on taxable income between £50,271 and £125,140
• 45% on taxable income above £125,140

Borrowing is harder: Banks tend to favour limited companies with business accounts. As a sole trader, you may need a longer trading history to access credit.

Some customers prefer limited companies: Larger organisations sometimes only contract with companies, especially for long-term or higher-value projects.

Finances can get messy: Without a clear divide between personal and business money, expenses and income can overlap. Keeping a separate business account makes it much easier to stay organised and set money aside for tax.

The pros and cons of being a limited company

Pros ✅	Cons ❌
Your personal finances are protected from business debts.	There's more complex paperwork and legal filing to do.
You could pay less tax overall on higher profits.	Your company's financial details are made public.
It projects a more professional and credible image.	You'll face higher setup and annual running costs.
A wider range of business expenses is tax-deductible.	You can't freely take money out of the business account.
Business and personal finances are kept completely separate.

Pros of being a limited company

Limited liability: If the company runs into debt, your personal assets are protected.

Tax efficiency: You pay Corporation Tax on profits and can take income as a mix of salary and dividends, which can lower your overall bill once profits rise.

Professional image: Some customers and agencies prefer to work with limited companies because it appears more official. It can also help when applying for funding or investments since a company structure allows you to issue shares or bring in partners.

More deductible expenses: You can deduct more expenses before tax, like software, equipment, travel, and pension contributions.

Clearer finances: Company money stays separate, making bookkeeping and forecasting easier.

Cons of being a limited company

Additional paperwork: You have to submit annual accounts and a Corporation Tax return, and maintain proper financial records¹⁰. To manage this, many directors employ an accountant to assist.

Less privacy: Company data, such as basic financial information, is visible on Companies House.

Extra costs: It costs £50 to register¹¹, but annual accounting fees often range between £500 and £1,500.

Money access rules: Funds belong to the company. You can only take them as salary or dividends, not withdraw freely. Dividends can only be paid if the company has made a profit, so unlike a salary, they're not guaranteed.

Which structure could be better for you?

Situation	Sole trader vs limited company	Reasons why
Profit is under £40,000	Sole Trader 🧍	Simplicity and lower administrative costs.
Profit is £40k - £60k	Depends on risk ⚖️	Tax difference is small, so liability is the main concern.
Profit is over £80,000	Limited Company 🏢	Tax benefits typically become more significant.
Your work is high-risk	Limited Company 🏢	It protects your personal assets from business debts.
You're testing an idea	Sole Trader 🧍	It's the easiest and cheapest way to start.

Your profit level matters more than anything else here. If you're earning under £40,000, being a sole trader keeps things simple and your tax bill low. 

The paperwork takes an hour or two annually, and you’re not paying accountants to complete the forms that you could do yourself.

The difference in tax between £40,000 and 60,000 is minimal either way. 

At this point, think about liability instead. If your work carries real risk (construction, events, manufacturing), a limited company protects your personal assets even if it costs a bit more to run.

Past the £80,000 to £90,000 mark, the tax benefits of a limited company typically begin to outweigh the additional administrative costs.

At this level, the combination of Corporation Tax and dividend tax may become more favourable than the higher rates of Income Tax and National Insurance paid by sole traders.

Most people start as sole traders and switch once income steadies above £50,000. Your accountant can handle the transition. 

If you're earning £60,000 or more, working in a risky field, or finding that customers prefer limited companies, it's worth the change.

If you're testing an idea or keeping things small, stay as a sole trader until you have a reason to switch.

How to switch from a sole trader to a limited company

1. Register with Companies House: You’ll need a company name, company address (you may use your home address or the address of your accountant) and at least one director and shareholder.

2. Report that you're no longer a sole trader: Log into your Government Gateway and update your Self Assessment status. HMRC will close your sole trader record and set up Corporation Tax for your company.

3. Open a business bank account: A business must have its own account.¹⁰ When you have international customers or suppliers, Wise Business will allow you to receive and send money at the mid-market exchange rate without the 3-4% markup that most banks impose on currency exchange.

4. Transfer assets and contracts: Transfer your equipment, stock, or running contracts to the company. This may have an impact on your tax position, so discuss this with your accountant.

5. Communicate with your customers and suppliers: Provide them with your new company information, revise invoices, and use your new company name.

Connect your business to the world with Wise Business

Whether you're a sole trader invoicing customers abroad or a limited company paying overseas suppliers, you’re likely to lose money every time your high street bank converts currency.

Wise Business removes that markup.

With Wise Business, a one-time set up fee of £50 enables you to receive international payments with local account details in 8+ currencies. 

You can then convert these funds to 40+ currencies at the mid-market exchange rate (the one you see on Google) with no hidden fees.

Travelling abroad to meet suppliers? Use the Wise Business debit card to spend all over the world and earn 0.5% cashback.

And when it’s time to sort your bookkeeping, you can give the right parties view-only access to your statements, without sharing login details.

You can even connect Wise to 9 different types of accounting software to automate bookkeeping - all without a monthly subscription.

Be Smart, Get Wise.

Register for Wise Business ✍️

Disclaimer: The UK Wise Business pricing structure is changing with effect from 26/11/2025 date. Receiving money, direct debits and getting paid features are not available with the Essential Plan which you can open for free. Pay a one-time set up fee of £50 to unlock Advanced features including account details to receive payments in 22+ currencies or 8+ currencies for non-swift payments. You’ll also get access to our invoice generating tool, payment links, QuickPay QR codes and the ability to set up direct debits all within one account. Please check our website for the latest pricing information.

“I did the maths and realised that for a £20,000 payment, I saved around £700 compared to my traditional bank. Over time, that adds up to thousands of pounds, which I can invest back into the business”

-- Sarah Giblin, Founder of Riutbag

 

FAQs

What happens to my customers if I switch to a limited company?

You may need to revise your contracts with the company name and registration number. It will not bother most customers, but you should check before you begin invoicing under your new setup.

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

Yes. You can operate as a sole trader for one business and run a limited company for another. Many people do this when testing new ventures or keeping different income streams separate.

You'll need to file separate tax returns for each structure. Just make sure your bookkeeping keeps both businesses completely separate to avoid confusion at tax time.

What are the differences in expenses between a sole trader and a limited company?

Sole traders can claim daily business expenses such as travelling, office supplies or software, whereas limited companies may claim a broader scope of expenses. 

These cover such items as the salaries of the directors, their pension contributions, and professional fees, which are all deductible prior to tax.

Sources:

1. GOV.UK, What a sole trader is
2. GOV.UK, Register as a sole trader
3. GOV.UK, Rates and allowances: National Insurance contributions
4. GOV.UK, National Insurance: Introduction
5. GOV.UK, Set up a private limited company
6. GOV.UK, Corporation Tax rates and allowances
7. GOV.UK, When to register for VAT
8. GOV.UK, Income Tax rates
9. GOV.UK, Check if you have to pay tax on dividends
10. GOV.UK, Running a limited company
11. GOV.UK, Set up a private limited company

Sources last checked on October 15th, 2025

Disclaimer: The UK Wise Business pricing structure is changing with effect from 26/11/2025 date. Receiving money, direct debits and getting paid features are not available with the Essential Plan which you can open for free. Pay a one-time set up fee of £50 to unlock Advanced features including account details to receive payments in 22+ currencies or 8+ currencies for non-swift payments. You’ll also get access to our invoice generating tool, payment links, QuickPay QR codes and the ability to set up direct debits all within one account. Please check our website for the latest pricing information.