Sole Trader vs Limited Company: Which Is Actually Right for You?

The comparison, stripped to what actually differs

	Sole trader	Limited company
Legal status	You and the business are one entity.	Company is separate from you as director and shareholder.
Liability	Personal — unlimited exposure to business debts.	Generally limited to what you invested in shares.
Tax on profit	Income tax plus Class 4 NI on profits after expenses.	Corporation tax on company profit, then tax on salary and dividends you extract.
Admin	One Self Assessment return as a minimum.	Statutory accounts, confirmation statement, payroll, CT600.
IR35 exposure	None — IR35 does not apply to sole traders.	Relevant if you contract through your own company.

The IR35 row gets less attention than it deserves in pure tax comparisons. Sole traders have zero IR35 exposure — it simply doesn't apply. If avoiding that legislative risk entirely matters to you, it can outweigh the tax efficiency argument depending on how you weigh financial upside against the cost of getting status wrong. That's not an abstract concern for IT contractors; it's a live issue that changes take-home by thousands per year.

Why the old £30k rule of thumb stopped being true

Two changes broke the old advice. First, the dividend allowance fell from £2,000 in 2022/23 to £500 from 2024/25 onwards — a 75% cut that eroded the main limited company advantage at the margin. Second, the employer NI secondary threshold dropped from £9,100 to £5,000 in April 2025 while the employer rate rose to 15%, making the salary side of the extraction strategy more expensive too.

Combined, the crossover point where a limited company beats sole trader status on tax alone has moved up — often into the £50,000–£60,000 profit range depending on expenses and VAT status. There's no single number that applies to everyone, which is exactly why a generic rule of thumb was always going to age badly. Anyone still quoting £30,000 is working from a spreadsheet that predates changes most advisers have already priced in.

Sole trader tax, briefly

Tax	Rate
Income tax — basic rate	20% (£12,571 – £50,270)
Income tax — higher rate	40% (£50,271 – £125,140)
Income tax — additional rate	45% (above £125,140)
Class 4 NI	9% up to £50,270, then 2%

For full bands, allowances and the fiscal drag context behind these figures, see our complete UK tax rates guide.

The appeal of sole trader status isn't really the rate — it's the absence of admin. One return, no company accounts, no payroll for your own salary. If you value not thinking about compliance, that has real monetary and mental value before you even get to the numbers. Plenty of successful freelancers never incorporate, and not because they failed to do the maths.

Limited company tax, briefly

Tax	Rate
Corporation tax — small profits	19% (up to £50,000)
Corporation tax — main rate	25% (above £250,000)
Dividend tax — basic / higher / additional	8.75% / 33.75% / 39.35% above £500 allowance

The standard play remains a small salary — often £5,000 to sit at the employer NI threshold — plus dividends from remaining post-corporation-tax profit. It still works, but it's less dramatically advantageous than three years ago, and that shift hasn't fully filtered through to the generic advice people still repeat. If your accountant hasn't revisited your extraction strategy since the dividend allowance cuts, ask them to.

The admin gap is bigger than people expect going in

Incorporating adds recurring obligations that sole traders don't face:

• Statutory accounts filed with Companies House within nine months of year end
• Corporation tax return (CT600) within 12 months of accounting period end
• Annual confirmation statement (£34 at time of writing)
• PAYE RTI filings even for a £5,000 salary
• Personal Self Assessment on top of all company filings

Realistically, almost everyone running a limited company pays an accountant £800–£2,000 a year to handle this. That cost has to come off whatever tax saving the structure generates — at the lower end of the new crossover range, it can eat a meaningful chunk of the advantage. Incorporation isn't free even when the headline tax rates look favourable.

IR35 — the factor a pure tax comparison misses

Operating outside IR35 through a limited company can be more tax-efficient than sole trader status — that's the scenario most "go Ltd" advice imagines. Operating inside IR35 through a limited company often ends up worse than sole trader once you add extra admin and accountant fees for no corresponding benefit. You're running a company, paying for compliance, and still getting taxed like an employee on the contract income.

"Should I incorporate?" and "what's my likely IR35 status?" aren't separate questions for a contractor — they're the same question asked two different ways. A tax comparison that ignores IR35 is comparing a fantasy structure to a real one.

Other things that don't show up in a tax comparison

Liability

Sole traders are personally exposed to business debts — creditors can pursue personal assets. A limited company ring-fences commercial risk in principle, though banks and landlords often ask for personal guarantees anyway, which punches holes in the liability story when you need finance or premises.

Client perception

Some larger and public sector clients soft-prefer limited companies for procurement and credit-check reasons that have nothing to do with tax. In most freelance creative, technical and consulting work, it makes no practical difference — but it's industry-specific enough that asking peers in your sector beats reading a generic guide.

Making Tax Digital

From April 2026, Making Tax Digital for Income Tax applies to sole traders and landlords with income above £50,000, dropping to £30,000 in 2027 and £20,000 in 2028. That adds digital record-keeping and quarterly reporting obligations that narrow the simplicity gap that used to favour sole traders unconditionally. See our Making Tax Digital guide for timelines and what you'll need to do.

Where I'd land on this, honestly

Below roughly £40,000–£50,000 profit, sole trader is the sensible default for most people now. The admin saved is real money and time, and the incorporation tax advantage at that level has shrunk enough that it's often not worth the hassle — especially once accountant fees and the cognitive load of company filings enter the picture.

Above that band, run the actual numbers for your specific expense level rather than trusting any rule of thumb, including the revised ranges in this article. Our calculator does this in about thirty seconds and will tell you more than any general guide can, because your VAT status, pension contributions and expense profile all move the answer.

For contractors specifically, weigh the IR35 question alongside the tax question, not after it. A structure that looks optimal on a spreadsheet but leaves you inside IR35 on your main contract is the wrong answer even if the Ltd column wins on tax alone.

Frequently asked questions

Is the "£30,000 crossover" advice still accurate?

Not really, not anymore. Dividend allowance cuts and the 2025 employer NI threshold change have pushed the typical crossover point meaningfully higher — often £50,000–£60,000 depending on your expenses. Treat any fixed number, including ours, as a starting point rather than an answer.

Can I run a sole trader business and a Ltd company at the same time?

Yes — they're independent. Plenty of people keep a simple side activity as a sole trader while running a separate, more formal business through a company.

Do I need an accountant for a limited company?

Not legally, but realistically almost everyone uses one. Budget £800–£2,000 a year, and factor that cost into whether incorporating actually saves you money at your income level.

Is a limited company always the more tax-efficient choice above the crossover point?

At higher profits, generally yes — but "generally" is doing some work there. Your specific expenses, VAT status, and (if contracting) IR35 exposure all move the number. Run your own figures rather than relying on a general guide.