Sole trader or limited company – what’s right for you?

When you go it alone, there are a lot of decisions to make, from setting your rates to wondering whether buying a tiny kettle for the bedroom is inspired or delusional. But choosing whether to be a sole trader or limited company is a biggie. It’ll determine whether you’re open to new opportunities, or to avoidable cost and risk. So which is best for you?

My Accountant Friend offers a full set-up service, helping you decide what works for you and doing the paperwork for you, so that you can get on with the things you feel more comfortable with. In the meantime, here are a few things worth considering.


As a sole trader, you are your business. You’re taxed as you, under the usual income bands, and if the business loses money, you’re liable. In a limited company, your personal finances are separate from the business. It’s owned by the shareholders (that’s you) and run by its directors (again, you), who must make sure certain legal requirements are met. You can find out more about those at, or drop MAF a line and they’ll show you how they can take care of it all on your behalf.


Sole traders have to register as self-employed with HMRC and record their income and outgoings in order to work out income tax and national insurance.

For limited companies, it’s a bit more complicated. You need to register your business with Companies House, organise statutory accounts each year, send Companies House an annual return and pay corporation tax. Directors’ salaries are taxed via PAYE, but you also have to submit a tax return and pay tax on dividends.

One thing that’s the same for everyone is VAT: both sole traders and limited companies have to pay up if turnover exceeds £82,000.

Tax advantages

You really start to see the benefit of being a limited company when your business is making more than £40,000 per year. Companies pay a standard 20% corporation tax, while income tax starts at 20% and jumps to 40% when you’re earning £31,786 (£42,385 if you have the standard personal allowance).

Limited companies can also pay directors a salary of £10,600 plus a dividend up to £31,000 without triggering income tax. At least, that’s the case until 2016 when new dividend regulation comes in. After that, dividends of up to £5,000 will be tax free, and basic rate taxpayers will pay only 7.5% of anything above that, so savings are still possible – just a little less lucrative.

Decision time

If you’re just starting out and want a simple, minimum-effort business structure, becoming a sole trader is the easiest option. But when it’s time to grow your business, forming a limited company makes more sense. It offers flexibility in how you pay yourself, tax advantages and separation of personal and professional responsibility so you can focus on success rather than worrying about failure.

It’s possible to change your structure at any time, so don’t spend too much time worrying: get out there and build your business!

If you’re in need of an accounting friend to help you on your way, we say MAF’s the way forward. Talk through whether to be a sole trader or limited company, get all of your accounts sorted in a neat online dashboard, and never worry about that brown paper envelope dropping through your letterbox again!

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