What is the difference between a sole trader and a limited company?

A sole trader is a self-employed individual who owns and runs their business personally. A limited company is a separate legal entity registered with Companies House. The key differences are in tax treatment, personal liability, and the amount of admin required. Sole traders pay income tax and National Insurance on profits, while limited company directors pay corporation tax on company profits and can take income as a mix of salary and dividends.

Do tradespeople pay less tax as a limited company?

Often yes, particularly once your profits exceed around £30,000-£40,000 per year. Limited companies pay corporation tax at 19-25%, and directors can take dividends which are taxed at lower rates than income tax. However, the savings depend on your specific circumstances, and you need to factor in the cost of accountancy and additional admin.

Is a sole trader personally liable for business debts?

Yes. As a sole trader, there is no legal distinction between you and your business. If your business owes money or faces a claim, your personal assets — including your home and savings — could be at risk. A limited company provides limited liability, meaning the company's debts are generally separate from your personal finances.

When should a tradesperson switch from sole trader to limited company?

Consider switching when your annual profits consistently exceed £30,000-£40,000, when you want to protect personal assets with limited liability, when you are taking on larger commercial contracts that require limited company status, or when an accountant confirms the tax savings would outweigh the additional costs and admin.

Is there more admin involved in running a limited company?

Yes. A limited company requires annual accounts filed with Companies House, a corporation tax return, confirmation statements, payroll if you pay yourself a salary, and formal record-keeping. Most limited company directors use an accountant, which typically costs £800-£1,500 per year for a small trade business.

Sole Trader vs Limited Company for Tradespeople — Which Is Right for You?

One of the biggest decisions you'll face when starting out as a tradesperson is how to structure your business. Most tradespeople begin as a sole trader — it's quick, simple, and gets you working fast. But as your income grows, you might wonder whether forming a limited company could save you money or protect you better.

There's no one-size-fits-all answer. The right choice depends on your earnings, your appetite for paperwork, and how much risk you're comfortable with. Here's an honest breakdown of both options to help you decide.

What's the Difference?

As a sole trader, you and your business are legally the same thing. You keep all the profits, but you're also personally responsible for any debts or legal claims.

A limited company is a separate legal entity. It owns its own assets, holds its own debts, and you're a director (and usually the sole shareholder). Your personal finances are separate from the business — at least in theory.

Tax: Where Most People Start Comparing

As a sole trader, you pay income tax on your profits. For the 2025/26 tax year, that's 20% on earnings between £12,570 and £50,270, and 40% above that. You also pay Class 2 and Class 4 National Insurance contributions on top.

With a limited company, the business pays corporation tax on its profits (currently 25% for profits over £250,000, with a small profits rate of 19% for profits under £50,000). You then pay yourself through a combination of a small salary and dividends. Dividends are taxed at lower rates — 8.75% at the basic rate — which is where the potential savings come in.

For many tradespeople earning between £40,000 and £80,000 in profit, a limited company can save a meaningful amount each year. Below £30,000 or so, the savings often don't justify the extra hassle. Your accountant can run the numbers for your specific situation.

Liability: Protecting Yourself

This is the bit that catches people out. As a sole trader, if a customer sues you or the business runs up debts, your personal assets — your home, savings, van — could be at risk.

A limited company provides a layer of protection. If the company owes money, creditors generally can't come after your personal belongings (unless you've given personal guarantees or been negligent as a director).

That said, public liability and professional indemnity insurance are essential regardless of your structure. Limited liability isn't a substitute for proper cover.

Admin and Paperwork

Sole trader admin is straightforward. You register with HMRC, file a Self Assessment tax return once a year, and keep records of your income and expenses. That's largely it.

A limited company comes with more obligations. You'll need to file annual accounts with Companies House, submit a Corporation Tax return, maintain a confirmation statement, keep statutory registers, and run payroll for your salary. Most limited company directors use an accountant, which typically costs £800–£1,500 per year more than sole trader accounts.

If you value simplicity and hate paperwork, staying as a sole trader has a lot going for it. Getting your invoicing process right is important whichever route you take.

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The VAT Threshold

Whichever structure you choose, you must register for VAT once your taxable turnover exceeds £90,000 in a 12-month period. This applies to both sole traders and limited companies alike.

Some tradespeople worry that going limited will somehow push them towards VAT registration sooner, but it doesn't — the threshold is based on turnover, not business structure. Understanding your numbers is key, and pricing your jobs correctly helps you stay on top of where you stand.

When Should You Switch?

There's no magic number, but most accountants suggest seriously considering a limited company when your annual profits consistently exceed £35,000–£40,000. At that level, the tax savings start to outweigh the extra costs and admin.

Other reasons to switch include:

Taking on larger contracts — some commercial clients and main contractors prefer or require you to be a limited company.
Wanting to appear more established — rightly or wrongly, "Ltd" after your name can lend credibility.
Planning to grow your business — if you're hiring employees or subcontractors, a company structure makes more sense.
Protecting personal assets — if you're working on high-value projects where liability is a concern.

Get Proper Advice

This article gives you the broad strokes, but tax rules change regularly and everyone's situation is different. A good accountant who understands the construction and trades sector is worth their weight in gold. They'll factor in your specific income, expenses, pension contributions, and personal circumstances to give you a clear recommendation.

Many accountants offer a free initial consultation — take advantage of it before making the switch.

The Bottom Line

Starting as a sole trader is perfectly sensible for most tradespeople. It's simple, cheap to set up, and has minimal admin. As your profits grow beyond £35,000–£40,000, it's worth crunching the numbers on going limited. Just make sure the tax savings genuinely outweigh the extra costs and complexity — and always get professional advice before making the leap.