Sole trader or limited company? A guide for freelancers
By Oakridge Accounting · Updated 4 min readFigures for 2026/27
The short answer
- How much profit you take out each year matters most. If you take it all out, a limited company gives little or no tax benefit.
- If you leave profit in the business, a company lets you control when you pay personal tax and fund growth from profit taxed at 19%, before dividend tax when you take it out.
- A company gives limited liability but means more admin and higher accountancy fees. A sole trader is simpler and keeps accounts private.
- Many freelancers start as a sole trader and incorporate later.
The main differences
| Sole trader | Limited company | |
|---|---|---|
| Liability | You're personally liable for business debts | The company is a separate legal entity; your liability is usually limited |
| Tax on profits | Income tax and Class 4 National Insurance on all profit, whether you take it or not | Corporation tax on profit; you pay personal tax only on what you take out |
| Paying yourself | Profit is yours | Salary and dividends |
| Filing | Self Assessment, plus Making Tax Digital quarterly updates over the threshold | Annual accounts, corporation tax return, confirmation statement, payroll, plus your own Self Assessment |
| Privacy | Your accounts stay private | Accounts and director details are on the public register at Companies House |
| Setting up | Register with HMRC | Register with Companies House, open a business bank account |
The tax, side by side
£60,000 of profit in 2026/27 (England, no other income), with everything taken out. The director takes a £12,570 salary and the rest as dividends, and the company can't claim the Employment Allowance.
| Sole trader | Limited company | |
|---|---|---|
| Income tax on profit or salary | £11,432 | £0 |
| Class 4 National Insurance | £2,457 | n/a |
| Employer National Insurance | n/a | £1,136 |
| Corporation tax | n/a | £8,796 |
| Dividend tax | n/a | £3,977 |
| Total tax | £13,889 | £13,909 |
| Take-home | £46,111 | £46,091 |
Taking everything out, the two come out about the same: the sole trader keeps about £20 more, before accountancy fees. A few years ago a company usually came out ahead, before the rises in employer National Insurance and dividend tax.
If you leave profit in the business
A sole trader is taxed on all their profit, whether or not they take it out. A director chooses how much salary and dividends to draw, and is only taxed personally on that.
Profit left in the company pays corporation tax (19% up to £50,000 of profit) and can fund growth, a cash buffer or pension contributions. It isn't tax-free: dividend tax is due when you take it out. The benefit is control over timing and amount.
The same £60,000 of profit, but only £30,000 needed to live on:
| Sole trader | Limited company | |
|---|---|---|
| Income tax on profit or salary | £11,432 | £0 |
| Class 4 National Insurance | £2,457 | n/a |
| Employer National Insurance | n/a | £1,136 |
| Corporation tax | n/a | £8,796 |
| Dividend tax | n/a | £2,039 |
| Total tax | £13,889 | £11,971 |
| Taken to live on | £30,000 | £30,000 |
| Left over | £16,111 | £18,029, in the company |
The company pays about £1,900 less tax this year, leaving £1,900 more to invest in the business. That £18,029 hasn't had dividend tax yet: taken out later in a basic-rate year, it's worth about £16,100, much the same as the sole trader's £16,111. The benefit is timing and control.
Reasons to choose a limited company
- You want to keep profit in the business to grow it, or to smooth your income.
- You want to choose when you pay personal tax.
- You want limited liability.
- Your clients only contract with limited companies.
- You want to make larger pension contributions through the company.
Reasons to stay a sole trader
- You take out everything you earn.
- You want the simplest setup and private accounts.
- You want to keep admin and fees down.
- You're just starting out.
Accountancy fees are usually higher for a company because there's more to do. With us, sole trader packages start at £49 a month and our Limited Company package is £179, including director payroll and your own Self Assessment return.
Changing later
You can start as a sole trader and incorporate later. Timing matters, because it affects your final sole trader tax return and can involve transferring equipment and contracts. Talk to us before you set the company up.
Questions people ask
Is a limited company more tax-efficient than being a sole trader?
It depends on how much profit you take out. If you take it all out, a limited company usually saves little or nothing, since employer National Insurance and dividend tax both rose in 2025 and 2026. If you leave profit in, you control when you pay personal tax and can fund growth from profit taxed at corporation tax rates.
At what profit should I become a limited company?
There's no single figure now. It depends more on how much you need to take out each year, whether you'll retain profit, and whether your clients require a company, than on profit alone.
Do I need an accountant for a limited company?
You don't have to have one, but most directors do, because of the accounts, corporation tax return, payroll and filing deadlines involved.
This guide is general information, not advice for your situation. Tax rules change and the right answer depends on your circumstances, so speak to us (or another qualified adviser) before acting on it.