Sole trader vs limited company UK 2025 | Figures Chartered Accountants

One of the first big decisions when you start a business in the UK is whether to operate as a sole trader or set up a limited company. The choice affects tax, liability, admin, and how you are seen by customers and lenders. This article compares sole trader vs limited company in the UK for 2025, so you can make an informed choice.

We cover the main differences in tax, liability, and administration, and when one structure might suit you better than the other. This is for new and existing business owners in the UK who are deciding on or reviewing their structure.

What is a sole trader and what is a limited company?

Sole trader

You are the business. There is no legal separation between you and the business. You keep the profits (after tax), you are personally liable for debts, and you pay income tax and National Insurance on your profits via self assessment. Setup is simple: you tell HMRC you are self-employed and keep records.

Limited company

The company is a separate legal entity. It has its own name, bank account, and tax obligations. You are a director and (usually) a shareholder. The company pays corporation tax on its profits; you pay tax on what you take out (salary and dividends). Your personal assets are generally protected if the company fails, except where you have given personal guarantees. Setup involves registering with Companies House and following company law. For more on company accounts and tax, see our Statutory Accounts & Tax service.

Tax: sole trader vs limited company UK 2025

Sole trader

You pay income tax (20%, 40%, 45% bands) and Class 2 and Class 4 National Insurance on your taxable profits. There are no dividends; all profit is taxed as income. You pay tax on profits whether or not you draw them.

Limited company

The company pays corporation tax (19% on small profits, 25% on profits over £250k for 2025/26). You then take money out as salary and/or dividends. Salary is subject to income tax and NI; dividends have a separate (and often lower) tax treatment and no NI. So at higher profit levels, a limited company can be more tax-efficient because of the mix of corporation tax and dividend tax. The gap depends on your level of profit and other income. GOV.UK business structures and HMRC guidance explain the tax rules.

Liability and risk

As a sole trader, you are personally liable for business debts. If the business cannot pay, creditors can pursue your personal assets. As a director of a limited company, you are generally not personally liable for company debts unless you have given a guarantee or breached your duties. That protection is one of the main reasons many businesses incorporate as they grow.

Administration

Sole traders: self assessment, record-keeping, and (if applicable) VAT. Limited companies: Companies House filings (annual accounts, confirmation statement), corporation tax, payroll if you pay yourself a salary, and more detailed record-keeping. Running a limited company is more admin; an accountant can handle most of it. See our bookkeeping and statutory accounts services.

When might you choose sole trader?

You are just starting and want minimal setup and admin.
Your profits are modest and the tax difference is small.
Your work is low-risk and you are comfortable with personal liability.
You prefer simplicity and do not need to retain profits in the business in a separate entity.

When might you choose a limited company?

You want to limit personal liability.
Your profits are higher and the tax treatment of dividends is attractive.
You want to build a separate entity (e.g. for sale or investment).
Customers or lenders expect or prefer to deal with a limited company.

UK tax and legal accuracy

Tax rates and thresholds for 2024/25 and 2025/26 apply. Rules can change. This article is for informational purposes only and does not constitute professional tax or financial advice. Please speak to a qualified accountant before choosing or changing structure.

Frequently asked questions

Can I switch from sole trader to limited company later?

Yes. You would set up a company, transfer the business (or its assets), and follow the rules for ceasing self employment and starting to work through the company. There can be tax and practical implications; your accountant can guide you.

Do I pay less tax as a limited company?

It depends on your profit level and how you take money out. At higher profits, the combination of corporation tax and dividend tax can be lower than sole trader income tax and NI. At lower profits, the difference may be small or favour the sole trader.

What about pensions and benefits?

Sole traders can pay into a personal pension and get tax relief. Limited company directors can have a company pension and other benefits; the company may get corporation tax relief on employer contributions. The rules differ; take advice.

Is it harder to get a mortgage or loan as a sole trader?

Some lenders treat sole traders and limited company directors differently (e.g. how they assess income). It is not always harder, but the criteria can differ. Speak to a broker or lender.

Can I have both?

You can be a sole trader in one venture and a director of a limited company in another. They are separate for tax and legal purposes. Do not mix the two; keep records and bank accounts separate.

Summary and next steps

Sole trader vs limited company in the UK in 2025: sole trader is simpler and you are personally liable; limited company gives liability protection and can be more tax-efficient at higher profits, with more admin. The right choice depends on your profits, risk, and plans. Many businesses start as sole traders and incorporate when they grow or need the protection.

If you would like to discuss your structure or switch from sole trader to limited company, we would be glad to help. At Figures Chartered Accountants we work with UK sole traders and limited companies on tax and accounts. You can book a discovery call or look at our Statutory Accounts & Tax service.