If you’re thinking about going solo, a quick breakdown of sole trader vs limited company tax can make all the difference in making the right call.
Each option has its pros and cons, and understanding the tax side of things is key to making a smart, informed decision. ✨
As a sole trader, you’re self-employed in the UK, with no real legal separation between you and your business. This means you’re personally responsible for any business debts, putting your assets, like your house or car at risk.
You’ll also need track your income and register with HMRC for Self Assessment. To stay as protected as possible, you might want to consider professional indemnity insurance.
On the flip side, a limited company (LTD) is its own legal entity, registered at Companies House. Your business finances are separate from your personal ones, so you’re not personally liable for the company’s debts.
When it comes to sole trader vs limited company tax, sole traders are taxed on their profits as personal income, while an LTD is taxed separately, which can lead to better tax efficiency and potential savings.
We’re not trying to poop the party, but we are your friendly neighbourhood tax know-it-alls, so we’ll bring tax into it every time.
So with that being said, let’s talk about the implications of sole trader vs limited company tax.
Sole trader tax 101(s):
If your expenses aren’t extortionate (or in this case, less than £1,000) keep it simple. Just use the tax-free Trading Allowance. No receipts, no problem.
And if you want to keep your receipts but prefer storing them online, you can use our AI data-extraction tool to take a picture, and keep it in your account for later use. 🎉
Limited company tax 101(s):
Okay, if you’re going down the LTD route, the first thing you need to figure out is how to pay yourself. Here are your options:
Whether you go the sole trader route or the LTD route, there are always tax tidbits to consider, making the choice between sole trader vs limited company tax a personal decision rather than a one-size-fits-all one.
National Insurance (NI) contributions also differ when comparing sole trader vs limited company tax setups.
For LTD owners, the NI contributions can be higher, which is why many small business owners opt to pay themselves a smaller salary and supplement the rest with dividends to reduce their NI costs.
National Insurance rates in the 2025/26 tax year 👇
| NI class | Who pays? | How much? |
| Class 1 | Employees earning over £12,570 | 8% on earnings between £242 and £967 per week
2% if you earn £967+ per week |
| Class 1A/1B | Employers | 15% |
| Class 3 | Voluntary contributions | £17.75 per week |
| Class 4 | Self-employed earning over £12,570 | 6% on profits between £12,570-£50,270
2% on profits over £50,270 |
The filing process is another area where differences become clear:
If you’re a sole trader, you only need to file a Self Assessment tax return once a year.
If you’re not completely sold on getting your tax return sorted and filed for you, we get it. Read our guide on HMRC vs TaxScouts to get the inside scoop on what makes us the obvious choice.
If you do business through a LTD, then you need to:
For many, the filing process is one of the deciding factors when comparing sole trader vs limited company tax structures.
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.
If you ever want to make a switch to go from sole trader to limited company, it’s a straightforward process 🙌
When it comes to sole trader vs limited company tax, there’s no cut-and-dried answer. Sole traders keep things simple but take on more personal risk, while limited companies get tax perks but have extra admin to deal with. Weigh up the pros, the cons, and of course, the tax before making your move.
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