This is the single most common question new UK business owners ask: should I register as a sole trader or set up a limited company? The answer depends on your income level, risk tolerance and how much admin you are willing to handle.
What Is a Sole Trader?
A sole trader is the simplest business structure. You and the business are legally the same entity. You register with HMRC for Self Assessment, file one tax return per year and keep basic records. There is no Companies House registration, no annual accounts filing and no public register of your details.
The downside is unlimited liability. If your business owes money, creditors can come after your personal assets — your house, car and savings.
What Is a Limited Company?
A limited company is a separate legal entity with its own identity. Your personal liability is limited to your investment — usually £1 in share capital. Read our guide to starting a limited company for the full process.
Tax Comparison
As a general rule, once profits exceed roughly £30,000-£35,000 per year, a limited company becomes more tax-efficient. Below that, the extra admin costs often outweigh the tax savings. Sole traders pay Income Tax (20-45%) plus Class 2 and Class 4 National Insurance. Limited companies pay Corporation Tax (19-25%) and directors typically take a small salary plus dividends.
Use the CalcPad tax comparison calculator to run your own numbers.
Admin and Compliance
Sole traders have minimal admin: one Self Assessment tax return per year and basic bookkeeping. Limited companies must file annual accounts with Companies House, submit a Corporation Tax return, file a confirmation statement annually, maintain statutory registers and keep board minutes. Most directors hire an accountant (£500-2,000/year).
Credibility and Perception
Some clients prefer working with limited companies. It signals permanence and professionalism. Your company details are on the public register — anyone can look you up on BizLookup to verify you are legitimate.
When to Switch
Consider switching from sole trader to limited company when:
- Annual profits consistently exceed £30,000-35,000
- You want to protect personal assets from business liabilities
- Clients require Ltd status for contracts
- You want to bring in partners or investors
- You plan to sell the business (selling shares is more tax-efficient)
The Bottom Line
Starting out with a side hustle earning under £30,000? Sole trader is simpler and cheaper. Once established and earning more, the tax savings and liability protection of a limited company usually make the switch worthwhile. Either way, keep clean records from day one — it makes any future transition far easier.