Sole Trader or Limited Company in the UK: Which is best for you? (2024)

FAQs

Sole Trader or Limited Company in the UK: Which is best for you? ›

As a sole trader, the more revenue that your business makes, the higher your tax rate will likely go. Limited companies get many more tax benefits when compared to sole traders. Unlimited liability. As a sole trader, both you and your business are considered to be one and the same.

A sole trader pays income tax on all their business profits. If you have a particularly successful year, you'll pay more tax. A limited company has more flexibility. You can choose to draw a regular salary, which is taxed as normal income, but you can also earn dividends, which are taxed at a lower rate.

Sole traders are the most popular form of business due to their simplicity, flexibility, and minimal legal requirements. As a sole trader, individuals have complete control over their business decisions, retain all profits, and have simplified tax obligations.

Trading through a limited company means you can claim a broader range of expenses such as accountancy fees, equipment, software, phones, travel, internet, etc. Some expenses can offset your overall business profit, reducing the income you pay tax.

Greater Simplicity. Sole trader simplicity is one of the greatest advantages of this type of business structure. Almost every aspect of running the business is less complicated than with other types of businesses, such as a limited company.

Although choosing to register as a limited company includes more responsibilities for a business owner, limited companies are often considered safer than sole traders because there is less risk to the business owner if the business fails. However, it should be noted that sole traders are simpler and easier to operate.

The advantage of being self employed is that there is less hassle of filing tax and other documentation. The disadvantage of a limited company is that there is a lot of admin work, complex legal and reporting requirements.

The main benefits of being a sole trader include less paperwork, more earning potential, better work-life balance, low overheads, easy registration, and total privacy. Disadvantages of sole traders include unlimited liability, less customer trust, and a complex business transfer process.

Benefits of Setting up a Sole Proprietorship in the UK

Record keeping is relatively more straightforward, and expenses are less compared to the other forms of business entities. Sole proprietorships in the UK have the liberty to retain complete control over the business operations and direction.

Sole trader ('self-employed')

Sole trader is the most popular structure for a startup, and also the simplest. You pay income tax on your profits (rather than corporation tax), so any profits above £45,001 will be taxed at 40 per cent, and profits above £150,000 will be taxed at 45 per cent.

Is it worth setting up a limited company UK? ›

Another major benefit is that there are more tax efficiencies available as a limited company, particularly if your profits are above certain thresholds. From 2023, profits under £50,000 incur a Corporation Tax rate of 19%, with percentages rising up to a main rate of 25% for profits of £250,00 and above.

The Corporation Tax rate will be 19-25% for the 2023/24 tax year, but not for all limited companies. We've provided a breakdown: From the 1st of April 2023 businesses classed as 'main rate' will pay 25% in Corporation Tax. Companies with taxable profits below £50,000 will continue to pay 19%

Private limited companies are less flexible than other business structures, such as sole proprietorships and partnerships. They have to comply with a set of rules and regulations to operate. It is necessary to file documents such as annual returns, financial statements, and annual accounts with Companies House on time.

4 Tax planning limitations

There are usually fewer tax planning opportunities in working as a sole trader compared with being employed by a limited company. All profits earned by a sole trader are subject to income tax in the financial year in which they are made.

More than half (56%) of the businesses in the UK are sole proprietorships. In 2022, there were 4.2 million businesses in the services industry – 76% of the overall business population. London has the highest number of businesses per resident of any region in the UK (1,477 per 10,000 residents).

Yes, you definitely can! It is a fairly simple process. We see many people starting out as a sole trader and as their business grows, they then move to setting up a limited company. Some also move back to being a sole trader again.

Register the limited company with Companies House (there is a fee of £12 to do this). You will be registered for Corporation Tax at the same time. Let HMRC know that you will no longer be a sole trader. You'll need to complete a final Self Assessment by 31 January after the end of the tax year.