Almost every new client who walks into Edward Harris Accountants in Oldham asks me the same thing within the first ten minutes: “Should I be a sole trader or set up a limited company?”

And almost every one of them has been told something confident by a mate, a forum, or a YouTube video. Usually it’s “limited companies save loads of tax, just do it.”

Honestly? That advice used to be right far more often than it is now. The numbers have shifted, and plenty of people are still working off a rulebook that’s years out of date.

The Basic Difference

As a sole trader, you and the business are the same legal person. Whatever profit you make is your personal income, and you pay Income Tax and Class 4 National Insurance on it through Self Assessment.

A limited company is its own legal entity. It pays Corporation Tax on its profits, and you, as a director, take money out through salary and dividends, each taxed separately.

That one structural difference drives almost everything else we’re about to talk about. Tax, paperwork, privacy, liability, credibility. All of it flows from whether the business is you or something separate from you.

How the Tax Actually Compares

For 2026/27, a sole trader gets the £12,570 personal allowance, then pays 20% Income Tax up to £50,270 and 40% above that. On top, Class 4 National Insurance is 6% on profits between £12,570 and £50,270, and 2% above.

A limited company pays Corporation Tax at 19% on profits up to £50,000, 25% above £250,000, and a tapered effective rate in between. Then when you pull money out as dividends, you pay 10.75% at the basic rate and 35.75% at the higher rate, after a two-point rise in April 2026. The first £500 is tax-free.

Notice something? You’re taxed twice in a limited company: once on the profit, once when it reaches your pocket. The saving only appears when you leave money inside the company, or when the combined rate still comes in lower than what a sole trader would pay.

Here’s the part many people miss. Class 2 National Insurance stopped being compulsory for sole traders, and the main Class 4 rate fell to 6%. Meanwhile, dividend tax went up, and the allowance shrank to £500. Put those together and the old “incorporate once you hit £30,000” rule of thumb is basically dead.

So where’s the tipping point now? It genuinely depends on how much you need to draw out personally. If you spend every penny you earn, the gap is much narrower than it used to be, and at some profit levels a sole trader can actually come out ahead. If you only need a chunk of the profit and can leave the rest in the business, a company starts looking much better.

Example

A few months ago I worked with a freelance designer earning about £42,000 profit. She’d been told by a friend that she was “wasting thousands” by staying as a sole trader.

So we ran both scenarios properly. Salary of £12,570, dividends on top, Corporation Tax, accountancy fees, the lot. And you know what? The saving was tiny. After the extra admin and costs, it was barely worth the hassle.

She stayed a sole trader. A year later, her profit jumped to nearly double, and we revisited it. That time the numbers looked completely different. The point isn’t which structure won. It’s that the answer changed because her situation changed, and we only knew that because we checked.

Liability: The Reason People Actually Switch

Tax isn’t always the main driver. Sometimes it’s about protection.

As a sole trader, you’re personally on the hook for business debts. If things go badly wrong, your own assets, including your home, could be at risk. A limited company gives you limited liability, which separates the company’s debts from your personal finances.

I’ll be honest, though. That protection is thinner than people assume. If you’ve signed personal guarantees on loans or leases, which most lenders and landlords ask for, you’re still exposed. And directors can be held personally liable for things like wrongful trading or misusing company funds.

If you work in a field with real risk, like construction, consultancy with professional liability, or anything where a client could sue, limited liability is worth taking seriously. If you’re a dog walker with low exposure, it matters a lot less.

The Admin Reality Nobody Mentions

Sole traders have it easy. One Self Assessment return, one set of records, and your finances stay private.

A limited company means annual accounts, a Corporation Tax return, a confirmation statement, running payroll for yourself, and keeping your director’s loan account clean. Your company filings, including director names and addresses, are also public record at Companies House.

Then there’s Making Tax Digital for Income Tax, which began in April 2026 for sole traders and landlords with qualifying income above £50,000. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028. That means quarterly digital updates to HMRC rather than one annual return, which narrows the simplicity advantage sole traders used to enjoy.

Does the extra admin feel worth it for your situation? It’s a question I’d ask yourself honestly before incorporating, not after.

Other Things That Tip the Balance

Pensions. A company can make employer pension contributions that are deductible against Corporation Tax, which can be a very efficient way to extract profit without personal tax. Sole traders can contribute personally and claim relief, but the mechanics are different.

Credibility. Some larger clients prefer dealing with a limited company, and some contracts effectively require it. In my experience, this alone pushes plenty of freelancers to incorporate, even when the tax maths is neutral.

Retaining profit. If you want to build up reserves inside the business, reinvest, or fund growth, a company lets you keep profit at the Corporation Tax rate without triggering personal tax until you take it out. A sole trader is taxed on all profit every year, drawn or not.

Losses. Sole traders can often use trading losses against other income, which can be valuable in a startup phase. Company losses are trapped inside the company, which can matter if you expect a slow first year.

Can You Switch Later?

Yes, and it’s usually easier to go from sole trader to limited company than the other way round. That’s part of why I often tell people to start simple.

But watch out for the transfer. Moving your business into a company can trigger tax considerations on assets like goodwill and equipment, so it’s not just a form-filling exercise. Plan it rather than rushing it.

What I’d Actually Tell You

If you’re just starting, earning modest profits, and don’t need to protect yourself from serious liability, start as a sole trader. It’s cheaper, simpler, and the tax gap is far smaller than the internet makes out.

If your profits are climbing well beyond £50,000, you want to retain money in the business, or you’re taking on real risk, then run both scenarios properly and consider incorporating.

Here’s my firm view: the sole trader versus limited company decision isn’t a one-off choice. It’s a question you should revisit as your business grows, because the right answer at £30,000 profit is rarely the right answer at £90,000. And anyone who tells you “just incorporate” without seeing your actual numbers isn’t giving you advice. They’re giving you a slogan.