Sole trader or limited company: liability, filing, switching

What to take away

Which taxes apply to each structure

As a sole trader, your profit is your income. You report it through Self Assessment, and HMRC charges Income Tax at the usual bands plus Class 4 National Insurance on profits above the threshold. There is no separate return for the business. The GOV.UK guide on becoming a sole trader sets out the registration route and the records you must keep.

A limited company pays Corporation Tax on its profits. To take money out you choose a salary, dividends or a mix. Each route has its own tax and National Insurance treatment. The rates, allowances and thresholds behind those taxes are reset for each tax year, which is why this comparison stays with which taxes apply to whom rather than a profit figure at which one structure wins; that figure moves every April.

Liability and personal risk

A sole trader has no legal separation from the business. Debts, contract disputes and claims land on you personally, and business insurance will not change who is liable.

A limited company is a separate legal person that can own assets, sign contracts and be sued in its own name. Shareholder liability is usually capped at the amount unpaid on shares, but directors still owe the general duties set out in sections 171 to 177 of the Companies Act 2006, owed by each director to the company.

Banks, landlords and larger customers may still ask a director to sign a personal guarantee. That puts personal assets back on the line, which narrows the gap between the two structures.

Filing duties and the public register

A sole trader files a Self Assessment return each year and keeps records of income and expenses. There are no annual accounts to file and no entry on a public register. The one hard date at the start is registration: HMRC must be told by 5 October after the end of the first tax year in which you need to complete a return, and telling it later can bring a penalty.

A limited company files annual accounts and a confirmation statement, and pays Corporation Tax. Companies House publishes directors' names, addresses and share details on the public register.

HMRC runs two separate clocks for the company. The Company Tax Return (form CT600) is due 12 months after the end of the accounting period it covers, but the Corporation Tax itself must be paid 9 months and 1 day after the end of that period, so the money is due before the return.

GOV.UK's step by step guide to setting up a limited company lists these filings in order, including registration for VAT and PAYE where they apply.

Sole traders with profit above the trading allowance register for Self Assessment, but the filing load stays smaller because there is no statutory accounts requirement or confirmation statement.

Comparing the two structures

The table below sets out the main differences to weigh before you register.

Structure and licensing are separate questions. A licence usually attaches to the activity, premises or person rather than to whether you trade as a sole trader or a company — a food business registers with the local council, for example, and selling alcohol needs a licence from the licensing authority. Check the rules for your sector before you decide.

If you do incorporate, GOV.UK sets out the registration steps and what you need to have ready before you start.

Admin load and switching

Sole trader admin is light: bookkeeping, one tax return, and insurance where clients require it. Incorporation adds accountancy, payroll, statutory records and Companies House filings, so the structure has to earn its keep.

Clients, larger buyers and some public sector contracts expect to contract with a company, and investors usually want shares to exist. Company formation agents compared sets out what paid incorporation support includes, so you can judge whether filing directly is enough.

Plan the switch as a project rather than a form, in this order: incorporate the company at Companies House, register it with HMRC for Corporation Tax, set up PAYE if the company will pay you a salary, then tell HMRC you have stopped trading as a sole trader and file your final Self Assessment return for the old business. Bank accounts, insurance, VAT registration and invoicing all need to move, and clients who signed with you personally may need new contracts.

Common questions

Do I pay less tax as a sole trader or a limited company?

It depends on profit and how you take money out. At low profit a sole trader is often cheaper overall once accountancy fees are counted. At higher profit a company can leave more in the business, but the saving is not automatic.

Can I switch from sole trader to limited company later?

Yes. You incorporate a new company, move the trade across and tell HMRC. You keep two sets of records during the crossover, and stock, assets and contracts have to be dealt with.

Is a company always better for avoiding personal risk?

No. Directors can be pursued personally for wrongful trading and some statutory breaches, and lenders often ask for a personal guarantee. That removes much of the protection in practice.