Sole Trader vs Limited Company as a Tradesperson

When starting your business as a tradesperson, one of the first major decisions you'll face is whether to operate as a sole trader or as a limited company.

In this guide, we'll look at the key differences between these two business structures and outline the pros and cons of each for tradespeople.

Let's get started!

Sole Trader vs Limited Company: What's the Difference?

In essence, a sole trader is personally responsible for their business and its finances, while a limited company is legally recognised as a separate entity from the individual and any personal assets are protected.

People tend to use "self-employed" and "sole trader" interchangeably, but they describe different things.

Self-employed is an employment status. It means you work for yourself rather than an employer, and you're responsible for handling your own tax.

Sole trader is a business structure, where one person owns and runs the business with no legal separation between the two, and while every sole trader is self-employed, not every self-employed person is a sole trader.

Someone in a business partnership, or a director running their own limited company, is also working for themselves without being a sole trader. To become a sole trader, you register with HMRC for Self Assessment, as opposed to registering the business at Companies House.

Here's how the two structures compare at a glance:

Income Tax bands are the same in England, Wales, and Northern Ireland. Scotland sets its own Income Tax rates and bands, still collected by HMRC through Self Assessment, so a Scottish-resident sole trader works out their Income Tax using the rates published on GOV.UK.

National Insurance, VAT, Corporation Tax, dividend tax, and Making Tax Digital work the same way across the UK.

What Is a Sole Trader?

If you register as a sole trader, you run your business as an individual, and are recognised as self-employed. You are personally responsible for any profits and losses that occur in the business, along with paying your taxes.

When Do You Need to Register as a Sole Trader?

You will need to set up as a sole trader if any of the following apply:

• You earned over £1,000 from self-employment in the last tax year (6 April to 5 April) — you must tell HMRC by 5 October after the end of that tax year, as registering late can lead to a penalty.
• You need to prove that you're self-employed.
• You want to make voluntary Class 2 National Insurance payments to qualify for benefits.

How to Set Up as a Sole Trader

If you believe becoming a sole trader is right for you, you will need to tell HMRC and action the following. If you work for a contractor, you're also likely to be paid under the Construction Industry Scheme.

• Keep records of the sales and expenses of your business.
• Send a self-assessment tax return every year.
• Pay Income Tax and National Insurance on your profits — Class 4 applies at 6% on profits between £12,570 and £50,270, and 2% above that, while Class 2 is treated as paid automatically once profits reach £7,105 a year. Below this, Class 2 is voluntary at £3.65 a week, to protect your entitlement to certain benefits. Both are worked out through your Self Assessment return.

Making Tax Digital for Income Tax

Once your qualifying income (your gross self-employment income plus any property income) passes a set threshold, you'll need to use Making Tax Digital for Income Tax instead of filing a standard Self Assessment return.

This applies to sole traders registered for Self Assessment, and the thresholds are being phased in gradually:

• Current Rate — Over £50,000.
• From 6 April 2027 — Over £30,000.
• From 6 April 2028 — Over £20,000.

In practice, this means keeping digital records of your income and expenses, using compatible software, sending a quarterly update for each business, and filing your tax return through that software. It doesn't apply to limited companies. For more on how this fits into your tax as a tradesperson, see our full guide.

VAT Rules for Sole Traders

This is something that applies to self-employed tradespeople, as well as those operating through a limited company.

You must register for VAT if your total taxable turnover for the last 12 months goes over £90,000 (as of 1 April 2024), or if you expect turnover to go over £90,000 in the next 30 days alone, a test that often catches trade businesses after a single large contract. Where the 12-month test applies, registration is due within 30 days of the end of the month you went over the threshold. You can register for VAT voluntarily if it suits the needs of your business, for example if you sell to other VAT-registered businesses and want to reclaim VAT.

Note: This limit applies to your last 12 months of taxable revenue. You can apply to deregister if you can satisfy HMRC that your taxable turnover for the next 12 months won't go over £88,000. HMRC won't accept this if the fall is because you plan to stop trading, or to pause taxable supplies for 30 days or more, within that period.

Naming Your Business

You can use your own name for your business if you are a sole trader or choose another name if you prefer. It's not essential that you register your name, however you must include your business name on all official paperwork, such as invoices and letters.

There are some rules when it comes to naming your business as a sole trader. Sole traders must not do the following when naming their businesses:

• Must not include 'limited', 'limited liability partnership', 'LLP', 'public limited company', or 'plc'.
• Must not be offensive or contain sensitive words or expressions.
• Must not be the same as any existing trademarks.
• Must not suggest a connection with government or local authorities (unless you have permission).

Pros and Cons of Being a Sole Trader as a Tradesperson

There are several advantages and disadvantages of becoming a sole trader. Below is a list of the pros and cons of a sole trader:

Pros

• ✔ Have complete control over business decisions, without a need of approval from directors or shareholders.
• ✔ Keep any profits for yourself (after tax and National Insurance contributions), as there aren't any other parties that require payment.
• ✔ A straightforward process with minimal paperwork. Registering as a sole trader means registering for Self Assessment with HMRC using your National Insurance number, rather than filing anything separately at Companies House.
• ✔ Greater privacy, as unlike limited companies your business and personal details are not publicly available.

Cons

• ✖ You're personally responsible for business debts, risking personal assets.
• ✖ Limited financing options, meaning you may have to rely on bank loans or personal funds.
• ✖ No annual leave (as self-employed, you don't usually get paid for holiday or time off sick).
• ✖ Income Tax and National Insurance are paid as an individual, with fewer planning options.

What Is a Limited Company?

In this section, we will go over what it means to be a limited company. If you're unsure of what a limited company is, read on to find out everything you need to know.

A limited company is a type of business that is legally separate from the owners. In the UK, a limited company must be incorporated at Companies House. This allows the business to be a separate entity in its own right with a unique company registration number.

As a limited company is separate from the owners by law, this means:

• The company is responsible for its own actions and can sue and be sued.
• The limited company can enter into contracts in its own name, including the employment of staff.
• The company is responsible for paying its own liabilities and debts.
• The company has the legal right to the money it makes from sales and can keep its profits.

The owners of a limited company are protected by limited liability. This means that, in most cases, the private owners of the business are protected as the business is a separate entity in its own right.

Below, we will take a look at the different types of limited companies, the initial set-up and any relevant taxes.

Private Company Limited by Shares

Most limited companies are private companies limited by shares. Ownership is divided into shares, and shareholders are only liable for what they agreed to pay for those shares, so their personal assets aren't at risk if the business runs into trouble.

Many private companies have a single shareholder, who also acts as the sole director, giving them full control of the business. Others have several shareholders, each entitled to voting rights and a share of any profits paid out as dividends, in proportion to how many shares they hold. Private limited companies can't offer shares to the general public.

Two other types of limited company exist, though neither is typically what a tradesperson would set up. One is a public limited company, which must hold at least £50,000 of issued shares and suits larger, established businesses, and the other is a company limited by guarantee, which has no shareholders and is typically used by non-profit organisations.

How to Set Up a Limited Company

If you believe that a limited company may be the best option for you and your business, you will need to set up as a limited company. To do this, you must do the following:

• Choose a company name.
• Gather all of the relevant information needed to set up your company.
• Prepare the memorandum and articles of association for the company.
• Verify your identity — a legal requirement since 18 November 2025 for directors (and equivalent roles, including members, general partners, and managing officers) and anyone with significant control. You may need the personal code Companies House gives you after verifying to register the company.
• Submit the incorporation to Companies House.
• Wait to be accepted on Companies House and receive your certificate of incorporation.
• Hold the company's first board meeting and write up minutes.
• Establish the statutory registers required for the company.
• Issue share certificates to each of the shareholders.

Registering online costs £100, paid by debit or credit card, and the company is usually registered within 24 hours. A postal application costs £124 and takes 8 to 10 days.

Taxes for Limited Companies

As a limited company is a separate legal entity in its own right, it is subject to its own taxes. Once the business is incorporated, you will need to register for corporation tax with HMRC. Corporation tax returns must be filed regularly, and corporation taxes must be paid to HMRC.

Money leaves a limited company in three ways:

• Salary — Means registering the company as an employer, running PAYE, and paying employer's National Insurance on top of what's deducted from your own pay.
• Dividends — Can only be paid from available profits, declared at a directors' meeting, and confirmed with minutes and a dividend voucher for each payment.
• Director's Loan — Anything you draw beyond the above counts as a director's loan, which the company has to record and which can create its own tax charge.

For 2026 to 2027, dividends carry a £500 tax-free allowance and are then taxed at 10.75%, 35.75%, or 39.35% depending on your Income Tax band, and because that income has already been taxed through Corporation Tax, the combined tax on money taken as dividends is Corporation Tax plus dividend tax.

The company may also be subject to some other taxes, including the following:

• Pay as You Earn via the payroll scheme if the company employs staff.
• VAT if the turnover exceeds the VAT registration threshold or if you opt to register voluntarily.
• Corporation Tax on gains when a company disposes of assets for a profit.
• Other taxes depending on the nature of the business and its trade.

If your tax returns are not submitted or paid on time, there may be penalties and sanctions for a company and its directors. Most limited companies will appoint an accountant to handle their finances and ensure that all payments and returns are made on time.

Pros and Cons of a Limited Company as a Tradesperson

There are several advantages and disadvantages of a limited company. Below is a list of the pros and cons of a limited company:

Pros

• ✔ Potential tax savings through Corporation Tax rates that can work out lower than Income Tax — 19% applies where profits are £50,000 or less, rising to 25% above £250,000, with Marginal Relief tapering the rate in between.
• ✔ Dividends are not subject to National Insurance Contributions.
• ✔ More flexibility in how some expenses are reimbursed (such as meals, accommodation, and travel).
• ✔ Easier to attract further investment, with the ability to sell shares in your company.
• ✔ Limited liability protection, usually meaning any personal assets aren't at risk.

Cons

• ✖ More admin and reporting is required (such as issuing accounts, tax returns, payroll, etc).
• ✖ Stricter legal responsibilities for management and company directors.
• ✖ Not as much flexibility in regards to income withdrawal compared to sole traders.
• ✖ Less privacy due to company information being publicly available via Companies House.

Switching from Sole Trader to a Limited Company

Some sole traders switch to a limited company as their business grows. This changes the business's legal status and brings a new set of ongoing responsibilities for the person running it.

You can hire an accountant to handle the day-to-day work, but you remain legally responsible for the company's records, accounts, and performance.

Here's what a director has to do:

• Follow the company's articles of association, keep company records, and report certain information to Companies House.
• Prepare annual accounts, the Company Tax Return and pay Corporation Tax.
• Tell other shareholders if you might benefit from a transaction the company enters into.
• File a confirmation statement with Companies House each year.
• Pay tax personally on any money taken out of the company, whether as salary or dividends.

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