Sole trader or limited company: beyond the tax math

Our short answer up front: below roughly 40,000 of profit, stay sole trader; the company’s fixed running costs usually eat whatever tax edge is left. With the tax comparison no longer settling the argument by itself, the rest of the sole trader vs limited company decision falls back to what it always should have been: structure, not arithmetic.

The standing cost of a company

Statutory accounts and corporation tax returns mean an accountant at 60-150 a month for a small services company, a confirmation statement and accounts filed at Companies House yearly (on public record: your numbers become searchable), payroll runs for your own salary, and dividend paperwork done properly. Budget 1,500-2,500 a year and some evenings. A sole trader’s overhead is one Self Assessment.

The genuine reasons to incorporate

Limited liability that means something when contracts carry real exposure (though banks still want personal guarantees). Agencies and enterprise clients that only contract limited companies, a hard filter in some sectors. Employer pension contributions from pre-tax profit, the cleanest remaining extraction route. Profit retention for reinvestment at corporation tax rates: 19% at small profits, 25% at the main rate, with marginal relief between (checked 2026-08-22 against gov.uk’s corporation tax rates). And a business you intend to sell: shares transfer, a sole trade barely does.

The genuine reasons to stay sole

Simplicity compounds: no public accounts, no payroll, no dividend minutes, losses in early years offsettable against other income, and winding down is a form, not a liquidation. Below roughly 40,000 of profit the company’s fixed costs alone usually eat any remaining tax edge, before you price your evenings.

If you switch, switch cleanly

Incorporate at your accounting year end, move contracts formally, re-register for VAT if you are over the threshold, and tell your insurer: a policy in the old name protects nobody. The expensive version is the half-migration that leaves invoices going to both entities for a year.