Self-Employed vs Limited Company: Tax, Cost and Admin Compared

Self-employed vs limited company is one of the most common decisions for anyone running their own business in the UK. As a sole trader you pay Income Tax and National Insurance on all your profits, while a limited company pays Corporation Tax and lets you withdraw income through a salary-and-dividend mix that can be more tax-efficient at higher earnings.

This guide compares the two structures side by side — covering tax rates, liability, compliance costs, and the practical factors that help you decide which one fits your situation.

Self-Employed vs Limited Company: Key Differences

Factor	Self-employed (sole trader)	Limited company
Legal status	You and the business are the same legal entity	The company is a separate legal entity
Liability	Unlimited — you're personally liable for all debts	Limited — your liability is capped at your investment
Tax on profits	Income Tax + Class 4 NI on all profits	Corporation Tax on company profits; Income Tax on salary/dividends you withdraw
Admin burden	Lower — Self Assessment return once a year	Higher — annual accounts, Corporation Tax return, confirmation statement
Setup cost	Free (just register for Self Assessment)	£50 online at Companies House (2025/26)
Privacy	Your details are not public	Director details and accounts are on public record
MTD from April 2026	Quarterly updates if income over £50,000	Not affected by MTD for Income Tax

Sole Trader vs Limited Company: How Tax Works

Self-Employed Tax

As a sole trader, your business profit is taxed as personal income. You pay:

Income Tax at your marginal rate (20%, 40%, or 45% for 2025/26)
Class 4 National Insurance at 6% on profits between £12,570 and £50,270, and 2% above £50,270 (2025/26)

All your business profit is taxed in the year you earn it, regardless of how much you actually withdraw for personal use.

Example: Sarah earns £45,000 profit as a freelance consultant.

Tax component	Calculation	Amount
Income Tax (basic rate)	(£45,000 − £12,570) × 20%	£6,486
Class 4 NI	(£45,000 − £12,570) × 6%	£1,946
Total tax		£8,432

Limited Company Tax

A limited company pays Corporation Tax on its profits. As a director, you then pay personal tax on whatever you take out — typically a combination of salary and dividends.

Corporation Tax rates (2025/26):

Annual profit	Rate
Up to £50,000	19%
£50,001 – £250,000	26.5% (marginal rate)
Over £250,000	25%

Dividend tax rates (2025/26):

Tax band	Rate on dividends
Basic rate	8.75%
Higher rate	33.75%
Additional rate	39.35%

The dividend allowance for 2025/26 is £500 — the first £500 of dividends is tax-free.

Example: James runs the same consultancy through a limited company with £45,000 profit. He pays himself a salary of £12,570 (the personal allowance) and takes the rest as dividends.

Step	Calculation	Amount
Company profit before salary		£45,000
Salary paid		£12,570
Employer NI on salary	(£12,570 − £5,000) × 15%	£1,136
Total salary cost to company	£12,570 + £1,136	£13,706
Taxable company profit	£45,000 − £13,706	£31,294
Corporation Tax at 19%	£31,294 × 19%	£5,946
Available for dividends	£31,294 − £5,946	£25,348
Income Tax on salary	£12,570 is within personal allowance	£0
Dividend tax (basic rate)	(£25,348 − £500) × 8.75%	£2,174
Total tax (employer NI + CT + dividend tax)	£1,136 + £5,946 + £2,174	£9,256

At £45,000 profit, the sole trader pays less overall (£8,432 vs £9,256). The employer NI cost on the director's salary erodes much of the Corporation Tax advantage at this level. The limited company structure generally starts saving tax as profits rise further, because the combined Income Tax and Class 4 NI rates exceed Corporation Tax plus dividend tax at higher income levels.

When a Limited Company Starts Saving Tax

Before April 2025, the crossover was often cited at around £30,000–£40,000. However, the increase in employer NI to 15% with a reduced secondary threshold of £5,000 (from April 2025) has pushed the break-even point higher. For 2025/26, the tax advantage of a limited company generally appears when profits consistently exceed £60,000–£70,000, though the exact crossover depends on your personal circumstances and salary/dividend strategy.

Annual profit	Approx. sole trader tax	Approx. ltd company tax	Difference
£25,000	£3,232	£4,039	Sole trader saves ~£810
£40,000	£7,132	£7,952	Sole trader saves ~£820
£60,000	£13,889	£13,169	Ltd saves ~£720
£80,000	£22,289	£23,196	Sole trader saves ~£910

These are illustrative figures for the 2025/26 tax year assuming a director salary of £12,570 and employer NI at 15% above the £5,000 secondary threshold. At £80,000, dividends begin to fall into the higher-rate band (33.75%), which reduces the ltd advantage. Different salary levels, retained profits, pension contributions, and other circumstances can shift the comparison significantly.

Important: Any tax saving also needs to cover the additional compliance costs of running a company (typically £1,000–£2,500 per year for accountancy fees). At profit levels where the tax difference is marginal, the extra admin and cost of a company may not be worthwhile.

Compliance and Admin Costs: Sole Trader vs Limited Company

Self-Employed Admin

Running as a sole trader involves relatively little paperwork:

Self Assessment tax return — filed once a year by 31 January
Record keeping — income, expenses, and receipts
Making Tax Digital — from April 2026, quarterly digital updates if your qualifying income exceeds £50,000 (dropping to £30,000 from April 2027)

Many sole traders manage their own tax returns without an accountant, especially with accounting software.

Limited Company Admin

A limited company has significantly more compliance requirements:

Annual accounts — prepared and filed with Companies House
Corporation Tax return (CT600) — filed with HMRC within 12 months of the accounting year end
Confirmation statement — filed annually with Companies House (£34 online)
Company tax account — for Corporation Tax payments
Payroll (RTI) — if you pay yourself a salary, you need to run payroll and submit Full Payment Submissions to HMRC
Dividend records — minutes and vouchers for each dividend payment
Public filing — your accounts and director details are on the Companies House public register

Most company directors use an accountant, adding £1,000–£2,500 per year in professional fees on top of what a sole trader would pay.

Limited Liability Protection: Does It Matter?

One of the main reasons people incorporate is limited liability. As a sole trader, you're personally responsible for all business debts — if the business fails, creditors can pursue your personal assets (home, savings, car).

As a company director, your liability is limited to your investment in the company (usually the value of your shares). Personal assets are protected if the company runs into financial difficulty.

When this matters most:

You take on large contracts with the risk of claims
You hold significant stock or work-in-progress
You borrow money for the business
Your industry carries professional liability risks

When it matters less:

You provide services with minimal financial risk
You don't hold stock or borrow commercially
You have professional indemnity insurance that covers your work

In practice, many lenders ask company directors for personal guarantees on business borrowing, which removes much of the limited liability benefit for loans.

Making Tax Digital: How It Affects the Decision

From 6 April 2026, sole traders with qualifying income over £50,000 need to use Making Tax Digital for Income Tax — submitting quarterly digital updates and a year-end final declaration.

Limited companies are not subject to MTD for Income Tax (they fall under Corporation Tax, which has its own digital filing requirements already in place).

For sole traders near the MTD threshold, this adds a compliance cost and admin burden that didn't exist before. However, MTD alone is unlikely to be the deciding factor — the compliance requirements of running a limited company (accounts, payroll, CT600) are generally more involved than MTD quarterly updates.

IR35, Pensions and Other Factors to Consider

Pension contributions: Both sole traders and company directors can make pension contributions. But company pension contributions are a deductible business expense for Corporation Tax, which can make them more tax-efficient through a company.

Mortgage applications: Some lenders find sole trader income easier to assess (one figure on your tax return). Company directors taking a low salary and dividends may find mortgage applications slightly more complex — though most lenders are familiar with this.

IR35 and contracts: If you work through a limited company but have a single client who controls how, where, and when you work, HMRC may treat the arrangement as disguised employment under IR35 rules. This removes most of the tax benefits of a company.

Growth and investment: If you plan to take on investors, sell part of the business, or bring in partners, a company structure is generally more suitable. Sole traders can't sell shares or bring in equity investors.

Frequently Asked Questions

At what income level is it worth setting up a limited company?

For the 2025/26 tax year, the pure tax advantage of withdrawing everything as salary and dividends typically appears around £60,000–£70,000 in profits, though this depends on your salary/dividend strategy. Before the April 2025 employer NI increase, the crossover was lower (around £30,000–£40,000). The saving also needs to exceed your additional accountancy and compliance costs (typically £1,000–£2,500 per year). If you can retain profits in the company or make employer pension contributions, the picture may be more favourable at lower levels — speak to an accountant for a personalised comparison.

Can I switch from self-employed to a limited company?

Yes. You can incorporate at any time by registering a company with Companies House and transferring your business activities. You'll need to register for Corporation Tax, set up payroll if paying yourself a salary, and close your sole trader Self Assessment (or keep it open if you have other self-employed income).

Do I need an accountant if I set up a limited company?

It's not a legal requirement, but most company directors use one. The compliance obligations — annual accounts, Corporation Tax returns, payroll, and dividend paperwork — are significantly more involved than a sole trader Self Assessment return. The cost of getting it wrong (late filing penalties, incorrect tax) usually outweighs the accountancy fees.

Is a limited company better for CIS subcontractors?

It can be, particularly for higher-earning subcontractors. Companies receiving CIS payments can offset deductions against their Corporation Tax or payroll liabilities. However, a company also brings more admin and the IR35 rules can apply if you work predominantly for one contractor. The decision depends on your specific earnings, number of clients, and appetite for compliance.

This guide is for informational purposes only and does not constitute tax, legal, or financial advice. Tax rules change frequently. Always verify current requirements on GOV.UK or consult a qualified accountant for your specific situation.