Self-Employed vs Limited Company
Thinking about how to structure your business? This guide compares the two most common options for freelancers and contractors in the UK.
Sole Trader (Self-Employed)
As a sole trader, you and your business are legally the same entity. You register with HMRC for Self Assessment, keep records of income and expenses, and file a tax return once a year. You pay income tax on your profits and Class 4 National Insurance.
Advantages:
- Simple to set up — register with HMRC online
- Minimal paperwork and lower accountancy costs
- Your financial information is private (no public filing)
- You keep all profits after tax
Disadvantages:
- Unlimited personal liability for business debts
- Less tax-efficient at higher profit levels
- Can appear less professional to some clients
Limited Company
A limited company is a separate legal entity. You register at Companies House, become a director, and the company pays Corporation Tax on its profits (currently 25% for profits above £250,000, with a small profits rate of 19% below £50,000). You pay yourself through a combination of salary and dividends.
Advantages:
- Limited liability — your personal assets are protected
- More tax-efficient at higher profits via salary + dividends
- Can appear more professional and credible
- More flexibility in tax planning
Disadvantages:
- More admin: annual accounts, confirmation statement, VAT returns
- Higher accountancy fees
- Public filing of accounts at Companies House
- IR35 rules can negate the tax advantages for contractors
Tax Comparison
At £50,000 profit, a sole trader pays approximately £10,500 in income tax and NI. A limited company director taking an optimal salary of £12,570 and the rest as dividends pays roughly £8,200 in total tax (Corporation Tax plus dividend tax), saving around £2,300.
The gap widens at higher profit levels. Use our self-employed calculator and dividend tax calculator to compare your own figures.
When to Incorporate
There is no single answer, but common rules of thumb suggest incorporating when your annual profits consistently exceed £30,000–£40,000, when you want limited liability protection, or when clients require you to work through a company. Always discuss the decision with an accountant who understands your specific situation.
Frequently Asked Questions
Can I switch from sole trader to limited company?
Yes. Many people start as a sole trader and incorporate later when their profits grow. You register a company at Companies House and inform HMRC. Your accountant can handle the transition.
How much does it cost to set up a limited company?
Registering at Companies House costs £12 online. Ongoing costs include annual accounts filing, a confirmation statement (£13/year), and typically higher accountancy fees — usually £800–£2,000 per year for a small company.
Do I pay less tax with a limited company?
Often, but not always. The combination of a low salary plus dividends can be more tax-efficient than sole trader income tax and NI at higher profit levels. Below roughly £30,000–£40,000 profit, the savings may not justify the extra admin.
What is IR35?
IR35 is legislation that targets contractors who would be employees if not for an intermediary company. If your contract falls inside IR35, you pay tax as if employed, removing much of the Ltd company tax advantage. Use our IR35 calculator for an estimate.
Important Disclaimer
The figures provided by this calculator are estimates based on the information you enter and published rates at the time of writing. They do not constitute financial, tax, or legal advice, and we accept no liability for decisions made on the basis of these estimates. Your actual liability may differ depending on your individual circumstances, applicable reliefs, and any changes to rates or legislation. Always consult a qualified professional or check the latest HMRC guidance at gov.uk before making financial decisions.