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Sole Trader vs Limited Company: When Is It Tax-Efficient to Go LTD?

Writer's picture: edenbookkeepingedenbookkeeping

Updated: 1 day ago

Over 60% of UK businesses operate as sole traders. That’s a huge number. But as your business grows, the question arises—should you stay a sole trader, or is it time to go limited?


This decision isn’t just about ticking a box on Companies House. It affects how much tax you pay, how much admin you handle, and even how much risk you take on personally. Going limited can bring tax efficiencies, protect your personal assets, and even make your business look more credible. But it also comes with more paperwork, stricter reporting requirements, and different tax obligations. So when does it actually make sense to switch?


Many business owners assume that once they hit a certain income threshold, going limited is a no-brainer. But tax efficiency isn’t the only factor. The structure of your business, your long-term goals, and how much you’re withdrawing as income all play a role. Get this decision right, and you could save thousands. Get it wrong, and you might end up with unexpected costs and admin headaches.


In this blog, we’ll break down the key differences between being a sole trader and running a limited company. We’ll explore the tax savings, the hidden costs, and the practical realities of both options—so you can make an informed choice that works for your business.



Sole Trader vs Limited Company: The Key Differences


Before we dive into tax efficiency, let’s clarify the fundamental differences between the two structures.


Sole Trader

A sole trader is considered the simplest way to run a business. You and the business are the same entity legally.


Pros:

  • You keep all the profits (after tax).

  • Minimal paperwork and reporting requirements.

  • Easier to set up and manage.


Cons:

  • You are personally liable for any debts.

  • Tax rates can become high as profits increase.

  • Less credibility with larger clients and lenders.


Limited Company


A limited company is a separate legal entity from you as the owner, which provides additional legal protections but comes with more obligations.


Pros:

  • Limited liability protects your personal assets.

  • Potential tax efficiencies, especially at higher income levels.

  • Can enhance credibility with clients and financial institutions.


Cons:

  • More administrative responsibilities, including filing accounts with Companies House.

  • Stricter financial regulations and reporting requirements.

  • Additional costs for accounting and compliance.


So when does it make financial sense to switch? Let’s explore the tax implications.



When Is It Tax-Efficient to Go Limited?


The biggest reason many sole traders switch to a limited company is tax efficiency. As a sole trader, you pay both Income Tax and National Insurance on your profits. As a limited company, you pay Corporation Tax on profits, and you can structure your income through salary and dividends, which can reduce your tax bill.


Income Levels and Tax Considerations


  • Earning under £30,000? Staying a sole trader is often more tax-efficient. The tax savings from a limited company at this level are minimal, and the additional admin costs may outweigh the benefits.


  • Earning £30,000 - £50,000? This is the grey area. You might see some tax savings, but they may not be significant enough to justify the extra admin costs. Other factors like liability protection and business perception may influence your decision.


  • Earning over £50,000? A limited company often becomes the more tax-efficient choice. Corporation Tax is currently 19% (rising to 25% for profits over £250,000), while sole traders pay 40% Income Tax on earnings above £50,270. Plus, dividend tax rates are lower than Income Tax rates.



The Tax Savings of a Limited Company


Here’s how a limited company can help you save on tax:


  • Corporation Tax is lower than higher-rate Income Tax. Instead of paying 40% or 45% Income Tax as a sole trader, you pay 19%-25% Corporation Tax on profits.


  • Paying yourself through dividends. Dividends are taxed at lower rates than Income Tax, meaning you could save significantly compared to withdrawing all profits as salary.


  • Business expenses and tax reliefs. A limited company can claim a wider range of allowable expenses, reducing taxable profit.


  • Employer’s National Insurance savings. By taking a mix of salary and dividends, you can reduce how much National Insurance you pay compared to a sole trader.


But tax savings aren’t everything. There are also costs and responsibilities to consider.



The Hidden Costs and Pitfalls of Going Limited


While going limited can save tax, it also comes with additional costs and complexities.


Accountancy Fees – Filing limited company accounts is more complex than sole trader tax returns, so accountant fees are higher.


More Admin & Reporting – As a limited company, you must file annual accounts with Companies House and submit a Corporation Tax return (CT600) to HMRC. There are stricter rules on record-keeping.


Stricter Banking & Money Management – You must have a separate business bank account and can’t use company funds for personal expenses without proper documentation.


Dividend Tax Rules – While dividends are tax-efficient, they still attract tax. The £1,000 dividend allowance was reduced to £500 in April 2024, making dividend taxation slightly less attractive than before.


Less Flexibility for Small Earnings – As a sole trader, if you have a low-income year, you simply pay less tax. With a limited company, you still have fixed costs like accounting fees and admin requirements, even if profits drop.



Making the Right Choice for Your Business


Deciding whether to remain a sole trader or go limited isn’t just about tax savings. Consider:


Your income level – If you're earning over £50,000, the tax benefits of a limited company are more pronounced.


Your risk level – If your business carries risk (e.g., contracts, liabilities), a limited company protects your personal assets.


Your long-term plans – If you want to grow, hire employees, or sell your business in the future, a limited company is often the better structure.


Your willingness to handle admin – Some business owners prefer the simplicity of a sole trader setup, even if they pay slightly more tax.




Going limited can be a smart financial move, but only at the right time. If your profits are growing and you’re looking for tax efficiencies, liability protection, and a more professional business structure, it may be the right step. But if you’re just starting out or keeping things simple, staying a sole trader could be the better option for now.


Before making the switch, speak to a qualified accountant or bookkeeper to assess your specific situation. A little planning now could save you thousands in the long run.


Need help deciding? Get in touch to discuss your numbers and see if going limited makes financial sense for your business.








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