Sole trader or limited company? The answer just moved on you.

The numbers, in one place

The 2026/27 rates, side by side.

As a sole trader, your profit is simply taxed as your income:

Class 2 NI is no longer compulsory since April 2024, it counts as automatically paid once your profit clears the small profits threshold. A limited company pays tax in three separate layers instead, Corporation Tax on company profit, then Income Tax and NI on whatever you pay yourself as salary, then dividend tax on whatever you take as dividends:

The scheme every generic guide skips

CIS, and why it barely changes with structure.

If you do construction work for a contractor rather than direct for the public, the Construction Industry Scheme sits alongside this decision, and not one of the generic business-structure guides mentions it. A contractor deducts 20% from your payments if you are registered under CIS, 30% if you are not, or nothing at all if you hold gross payment status.

Gross payment status needs a net construction turnover, ignoring VAT and materials, of at least £30,000 in the previous 12 months. That £30,000 test applies per person, sole trader or company director alike, or £100,000 for the whole company if it has several directors, so incorporating on your own does not make gross payment status any harder to reach than staying a sole trader.

The kit you actually own

Your van and tools, taxed differently by structure.

Both structures can claim the Annual Investment Allowance, up to £1 million a year, against a van or a set of tools bought for the business, so most trades never come close to the limit either way. Where it differs is private use. As a sole trader, if you genuinely use the van or a tool for private jobs some of the time, your allowance is reduced by that private-use percentage.

As a limited company, the company claims the full allowance regardless, the trade-off is that genuine private use of a company-owned asset can create a taxable benefit-in-kind for you as the director. Neither route is automatically better, it depends on how much private use is actually happening and whether that would be worth declaring either way.

What actually trips people up

Mistakes we see tradesmen make.

Not the generic “keep good records” list every guide repeats. From what actually comes up on trade and small-business forums when someone in this exact position asks for help: registering late after starting to trade and picking up an avoidable penalty. Not keeping business banking separate from personal, which turns CIS deductions and expense claims into a mess to untangle at year end. Incorporating purely because it “sounds more professional,” without ever running the actual tax numbers first, then discovering the admin cost was not worth it for the profit level involved.

And the one that catches people out worst: setting up a limited company “just in case” and assuming it can sit dormant indefinitely, then starting to invoice through it without realising the filing clock started the moment it was registered, not the moment it started trading.

Straight answers

Questions people actually ask.

Is it best to be a sole trader or ltd?

There is no universal answer, it depends on your profit level, how much admin you want, and how much liability protection matters to you. Under 2026/27 rates, our worked example below shows a sole trader keeping more than a one-person limited company all the way up to roughly £55,000-£65,000 profit, mainly because the employer National Insurance threshold fell in April 2025. The old "incorporate once you clear £25,000-£30,000" advice repeated across most guides on this is now out of date. Limited company liability protection is a separate, non-tax reason to incorporate regardless of profit.

What are 10 disadvantages of a sole trader?

Unlimited personal liability, so your own assets are exposed to a business debt or claim. No separate legal identity, a claim against the business is a claim against you personally. Harder to borrow at scale, lenders see your personal accounts, not a company balance sheet. No dividend route for tax planning. Class 4 National Insurance stacks on top of Income Tax as profit rises. No employer pension contribution route. Can look less established to some commercial clients when quoting for bigger contracts. Gross payment status under CIS still needs the same turnover test, with no corporate wrapper to ring-fence risk. Passing the business on or selling it is harder with no shares to transfer. And incorporating later brings its own admin, covered further down this page.

Who pays more tax, sole trader or limited company?

It depends on profit, and the crossover point has moved higher than most guides still say. Taking a director salary at the personal allowance with the rest as dividends, a sole trader keeps more at £35,000 and £50,000 profit. The two are close to level around £60,000. See the worked table below for the actual figures and the assumptions behind them.

Is it worth going from sole trader to limited company?

On tax alone, per the recompute below, the crossover has moved up to roughly £55,000-£65,000 profit, lower profit levels no longer clearly favour incorporating the way they did before April 2025. It can still be worth it below that for non-tax reasons: limited liability protection, and for some trades, a client that prefers contracting with a limited company. It is not worth it purely to cut tax below roughly £50,000 profit under current rates.

What are 5 disadvantages of a sole trader?

Unlimited personal liability. Class 4 National Insurance stacking with Income Tax as profit rises. Harder to raise business finance. No dividend tax planning route. Can look less established to some commercial clients or when tendering for bigger contracts.

How much tax do I pay if I am a sole trader?

Income Tax: 0% up to £12,570, 20% on the next band to £50,270, 40% up to £125,140, 45% above. Plus Class 4 National Insurance: 6% on profits between £12,570 and £50,270, 2% above that. Class 2 National Insurance is no longer compulsory since April 2024, it is treated as automatically paid once profit clears the small profits threshold, and voluntary below that if you want to protect your state pension record.

What are common mistakes sole traders make?

From what actually gets discussed on trade and small-business forums rather than an official list: not registering with HMRC within the deadline after you start trading. Treating Self Assessment deadlines casually and picking up avoidable penalties. Not separating personal and business banking, which makes CIS deductions and expense claims far harder to untangle. Incorporating purely because it "looks more professional" without running the actual tax numbers first. And setting up a limited company thinking it can just sit there, then starting to trade through it without realising the filing clock started the day it was registered.

Is it better to have a limited company or be a sole trader?

Same answer as above: it is profit-level dependent, and the tax-only crossover is now higher than commonly quoted, roughly £55,000-£65,000 rather than £25,000-£30,000, because of the 2025 employer National Insurance change. Liability protection is the main reason to incorporate that holds at any profit level.

What is the 2 year rule for small companies?

This is a company-size classification rule under company law, the same test that decides whether a company can claim audit exemption and which accounts format it must file. A company only moves between size categories after breaching, or ceasing to breach, the thresholds in two consecutive financial years, so one unusual year does not flip its status on its own. For a one-person trade limited company, which sits far below the thresholds in every case, this is not something you need to plan around, it only shows up in search results because larger companies ask about it.