A sole trader is the simplest structure — you and the business are the same legal entity. A limited company is a separate legal entity owned by you (and possibly other shareholders). The right choice depends on your income, risk profile, and how you feel about admin.
The four things that change when you incorporate
- Legal status: sole trader = you are the business; Ltd = the company is the business
- Personal liability: sole trader = unlimited (your assets are at risk); Ltd = limited to your investment in the company
- Tax: sole trader = Income Tax + Class 2/4 NIC on profits; Ltd = Corporation Tax on profits, Income Tax + dividend NIC on what you take out
- Admin: sole trader = self-assessment tax return annually; Ltd = annual accounts + confirmation statement + Corporation Tax return + dividend paperwork
When sole trader is the right choice
- Turnover under £40,000/year: the admin cost of a Ltd company outweighs the tax benefit
- You do not have significant business risk: no expensive equipment, no employees, no client data that could trigger a lawsuit
- You want minimum admin: one self-assessment return per year, no Companies House filings
- You want to keep things flexible: easy to wind up, easy to change name, no shareholder agreements
When Ltd company is the right choice
- Turnover over £80,000/year: the tax savings from incorporation start to outweigh the admin cost
- You have significant business risk: you handle client data, you have expensive equipment, your work could plausibly lead to a lawsuit
- You want to bring in partners or investors
- You want to brand yourself as "established"
- You are building a team
The tax difference, in real numbers
For a freelancer with £80,000 in profit, taking all profit as personal income: sole trader take-home is approximately £57,030; Ltd company (optimal salary + dividends) take-home is approximately £45,762. The sole trader takes home £11,268 more at this profit level.
How to switch
- Incorporate at Companies House (£12,50, usually approved within 24 hours)
- Register the new company for Corporation Tax (within 3 months of starting to trade)
- Register for VAT if applicable
- Transfer your business to the new company as a going concern
- Notify HMRC that you have ceased self-employment
- Set up a business bank account in the company's name
- Issue new invoices from the company going forward
Frequently asked
When should a freelancer incorporate?
A common rule of thumb: incorporate when profits reach £50,000-£60,000/year, and the tax savings justify the accountancy fees. Below that, the admin cost cancels out the benefit.
Does IR35 apply to sole traders?
IR35 applies to freelancers who would otherwise be employees of their end client. It is relevant whether you are a sole trader or a Ltd company. Outside IR35, the Ltd company structure works as described.
What are the hidden costs of a Ltd company?
Accountancy fees (£1,000-£3,000/year), Companies House filing fee (£12.50/year), registered office address (£30-£100/year), payroll software, and 5-10 hours/year more admin.
Written by Invosi Editorial · Tax & Compliance.