Sole Trader vs Limited Company: Which Structure is Best for You?

The Big Question

One of the most common questions we hear from self-employed clients in Stoke-on-Trent is: "Should I become a limited company?"

The answer depends on your circumstances, but here is what you need to know.

Sole Trader: The Basics

As a sole trader:

• You ARE the business - no legal separation
• You keep all profits after tax
• You are personally liable for business debts
• You pay Income Tax and National Insurance on profits

Best for: Those starting out, lower earners, simple businesses

Limited Company: The Basics

As a limited company:

• The business is a separate legal entity
• You are a director and/or shareholder
• Limited liability protects personal assets
• The company pays Corporation Tax on profits
• You pay yourself through salary and/or dividends

Best for: Higher earners, those wanting liability protection, businesses seeking investment

Tax Comparison (2024/25)

Let us compare the tax on £50,000 profit:

Sole Trader

Tax

Amount

|-----|--------|

Income Tax (after personal allowance)	£7,486
Class 2 NI	£179
Class 4 NI	£3,127
Total Tax	£10,792
Take Home	£39,208

Limited Company

Tax

Amount

|-----|--------|

Corporation Tax (25%)	£12,500
Salary £12,570 (tax-free)	£0
Employer NI on salary	£604
Dividend Tax on remainder	£1,819
Total Tax	£14,923
Take Home	£35,077

At £50,000 profit, sole trader is more tax-efficient.

At £80,000 Profit

Structure

Total Tax

Take Home

|-----------|-----------|-----------|

Sole Trader	£23,092	£56,908
Limited Company	£20,461	£59,539

At £80,000, limited company becomes more tax-efficient.

Beyond Tax: Other Factors

Limited Liability

As a sole trader, you are personally liable for all business debts. If things go wrong, your home and savings could be at risk.

A limited company provides a legal shield - the company's debts are not your personal debts (with some exceptions for fraud or personal guarantees).

Professional Image

Some clients and contracts require you to be a limited company. Having "Ltd" after your name can signal credibility.

Admin and Costs

Limited companies require:

• Annual accounts filed with Companies House
• Corporation Tax returns
• Confirmation statements
• Director responsibilities

This means higher accountancy fees (typically £500-1,500 more per year).

Pension Contributions

Both structures allow tax-efficient pension contributions, but limited companies offer more flexibility.

IR35 Considerations

If you work with clients through contracts, IR35 rules may affect whether limited company status benefits you. This is complex and requires specific advice.

When to Incorporate

Consider becoming a limited company when:

• Profits consistently exceed £50,000-60,000
• You want liability protection
• Clients require it
• You plan to seek investment
• You want to retain profits for growth

When to Stay Sole Trader

Stay a sole trader if:

• Profits are under £40,000-50,000
• Your business is low-risk
• You prefer simplicity
• You plan to wind down in a few years
• You withdraw all profits each year

The Incorporation Process

If you decide to incorporate:

1. Choose a company name

2. Register with Companies House

3. Set up company bank account

4. Register for Corporation Tax

5. Transfer business assets

6. Notify HMRC of sole trader cessation

We handle this entire process for you.

Local Advice in Stoke-on-Trent

The "right" structure depends on your specific situation. At Stoke Accounting Services, we help clients across the Potteries make this decision with a personalised analysis.

Our company formation service includes:

• Full tax comparison for your situation
• Registration with Companies House
• All necessary HMRC registrations
• Ongoing compliance support

Book a free consultation to discuss whether incorporation is right for you.