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Sole trader or limited company: which one to choose?

  • 3 min read
  • Last updated 24 Nov 2022

If you’re looking to work for yourself, then you need to choose between becoming a sole trader or setting up a limited company.

Each has pros and cons.


Sole trader:

If you go the limited company route, then you need to decide how to pay yourself:

  • Through a salary: you need to set up a Pay As You Earn (PAYE) scheme for yourself
  • Through dividends: remember that before paying dividends your company also has to pay 25% corporation tax
  • Or a combination of both

Winner: limited company, but not by much – mostly because you have more freedom in how you pay yourself and what you can expense.

National Insurance

This is one of the biggest differences.

This is why most one-man-band limited company directors prefer to pay themselves only enough salary to qualify for State Pension, and the rest as dividends.

Winner: sole trader.

The tax return process

Sole traders only need to file a Self Assessment tax return once a year:

If you do business through a limited company, then you need to:

  • Prepare annual accounts and a company tax return, which you file with HMRC
  • And also file a confirmation statement with Companies House

Corporation tax returns are much more expensive and you’ll also need to deal with bookkeeping or hire an accountant to do it for you.

Winner: sole trader – by far.

Debts and legal risks

This is another huge difference:

  • If you’re a sole trader, you are your business. Any business debts become your debts and what you own (including your house!) is not protected. However, a good professional indemnity insurance should be sufficient for most sole trades.
  • A limited company can protect you: the loans belong to the company, not you

Winner: limited company – but only if you need business insurance or a business loan.

Other factors to consider

  • Start-up costs: it’s free to register as a sole trader with HMRC
  • Privacy: limited company directors have to provide their details to Companies House – this info will be public
  • Credibility: many companies prefer to do business with other limited companies, or at least with VAT-registered sole traders
  • Funding: it can be difficult to get a business loan as a sole trader

Switching from one to the other

It’s easy to do and shouldn’t be a problem if you want to make a change. It’s completely up to you whether you start as sole trader and then set up a limited company down the line, or if you set it up straight away.

The self-employed brain
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