Written by the TaxTune Editorial Team · Reviewed by our qualified accountants · Updated for 2026
The quick answer A sole trader is simple and private but personally liable, and pays income tax and National Insurance on all profit. A limited company is a separate legal entity with limited liability, and can be more tax efficient through a salary and dividend mix, but comes with more admin and public filings. A company often starts to pay once profits comfortably exceed the point where the tax saving outweighs the extra cost.

How they compare

  1. Liability. A sole trader is personally liable for debts. A company limits your liability to what you put in, barring personal guarantees.
  2. Tax. Sole traders pay income tax and National Insurance on profit. Companies pay corporation tax, and directors take a salary and dividends, which can be more efficient.
  3. Admin. Sole trader admin is light. A company files accounts, a CT600 and a confirmation statement, and runs payroll for directors.
  4. Privacy and credibility. Company details are public at Companies House, but a limited company can look more established to clients and lenders.

When a company starts to pay

There is no single figure, but as profits rise the tax saving from a salary and dividend mix tends to outgrow the extra accountancy and filing costs. Liability, the type of clients you deal with, and your plans to grow all matter too. It is a decision worth modelling on your actual numbers rather than a rule of thumb.

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Frequently asked questions

Is a limited company more tax efficient than a sole trader?

It can be, through a salary and dividend mix and corporation tax, especially as profits rise. The saving needs to outweigh the extra admin and filing costs, so it is worth modelling on your figures.

What is the main advantage of a limited company?

Limited liability, meaning your personal assets are generally protected from business debts, plus potential tax efficiency and a more established image with clients and lenders.

What is the main advantage of being a sole trader?

Simplicity and privacy. There is far less admin, no public filings at Companies House, and your accounts are not on the public record.

At what profit should I form a company?

There is no fixed figure. As profits grow, the tax saving from incorporating tends to outweigh the extra cost, but liability and your plans matter too. It is best decided on your actual numbers.

Can I switch from sole trader to company later?

Yes. Many businesses start as a sole trader and incorporate once profits and plans justify it. The transfer needs to be handled correctly for tax.