When starting a business, you need to decide on its legal structure. The two most common options are becoming a sole trader or forming a limited company. Each has different implications for tax, liability, and administration.

Quick comparison

The right structure depends on your expected profits, risk tolerance, and how much admin you're willing to handle.

Business structure comparison

Compare sole trader, partnership, and limited company structures.

Sole trader: Simplest to set up. You keep all profits but are personally liable for debts.
Partnership: Share responsibilities and profits. Partners share liability for business debts.
Limited company: Separate legal entity. Personal liability limited to investment, but more admin.
LLP: Partnership with limited liability. Must file accounts at Companies House.

Business structure affects tax liability, personal liability, and required paperwork. Professional advice is recommended when choosing the right structure.

Formation costs

Companies House formation and filing fees

Current fees for company registration, confirmation statements, and other Companies House filings.

Standard incorporation (online): £50 (usually processed within 24 hours)
Same-day incorporation: £78 (submitted by 3pm, processed same day)
Paper incorporation: £71 (8-10 working days)
Confirmation statement (online): £34 per year (rising to £50 from 1 February 2026)
Confirmation statement (paper): £62 per year

Fee changes from 1 February 2026: Standard online incorporation rises to £100. Confirmation statement rises to £50 online. Check Companies House for current fees before filing.

Companies House fees

Tax comparison at different profit levels (2025/26)

Sole trader vs limited company tax comparison 2025/26

Estimated tax payable at different profit levels comparing sole trader and limited company structures.

The tax advantage of incorporation increases as profits rise. Below £30,000, administrative costs often outweigh savings. Above £50,000, incorporation typically saves £2,000-5,000+ per year.

£20,000 profit: Sole trader: ~£1,500 tax/NI | Ltd: ~£1,200 (minimal saving, accounting costs may exceed)
£30,000 profit: Sole trader: ~£4,000 tax/NI | Ltd: ~£3,200 (£800 saving, accounting costs ~£500-800)
£50,000 profit: Sole trader: ~£9,700 tax/NI | Ltd: ~£7,100 (£2,600+ saving after accounting costs)
£75,000 profit: Sole trader: ~£18,500 tax/NI | Ltd: ~£14,000 (£4,500+ saving)
£100,000 profit: Sole trader: ~£29,500 tax/NI | Ltd: ~£22,500 (£7,000+ saving)

Assumptions: Limited company figures assume optimal salary at Personal Allowance (£12,570), remainder as dividends. No other income sources. Single director/shareholder. Accounting costs excluded from Ltd figures.

National Insurance comparison (2025/26)

Sole trader NI

Self-employed National Insurance rates 2025/26

Class 2 and Class 4 NI rates and thresholds for self-employed individuals.

Self-employed individuals pay Class 2 and Class 4 National Insurance on their profits. Class 2 is a flat weekly rate that builds your State Pension entitlement. Class 4 is a percentage of your profits above certain thresholds.

Class 2 NI weekly rate: £3.50 per week
Small Profits Threshold: £6,845 per year (Class 2 voluntary below this)
Class 4 NI main rate: 6% on profits between £12,570 and £50,270
Class 4 NI additional rate: 2% on profits above £50,270
Class 4 Lower Profits Limit: £12,570 per year
Class 4 Upper Profits Limit: £50,270 per year
Effective from: 6 April 2025

How Class 2 works

If your profits are below £6,845, Class 2 is voluntary but you may choose to pay it to protect your State Pension and benefit entitlement. If your profits are £6,845 or more, Class 2 is treated as paid automatically (you do not need to pay separately).

Self-employed National Insurance rates

Limited company NI

Director-shareholders taking an optimal salary at the Personal Allowance (£12,570) pay no employee NI. The key tax advantage of a limited company is that dividends attract no National Insurance.

National Insurance contributions

Employer and employee NI rates and thresholds for 2025/26. Pure data reference.

From 6 April 2025, the secondary threshold was reduced to £5,000 per year (£96/week) and the rate increased to 15%.

Secondary Threshold (2025/26): £5,000 per year (£96/week)
Secondary Rate (2025/26): 15%
Employment Allowance (2025/26): £10,500 (no cap - all employers eligible)
Primary Threshold: £12,570 per year (unchanged)
Primary Rate: 12% on earnings £12,570-£50,270, 2% above

The Employment Allowance increased from £5,000 to £10,500 and the £100,000 employer liability cap was removed, meaning all employers are now eligible.

National Insurance rates and thresholds

Decision matrix: which structure is right for you?

Choose sole trader if:

Profits under £30,000 (tax savings don't justify admin burden)
You want minimal paperwork and compliance
You're testing a business idea before committing
Low-risk business with minimal liability exposure
You don't need external funding (EIS/SEIS not available)

Choose limited company if:

Profits above £50,000 (clear tax advantage)
You want liability protection for personal assets
You're seeking investment (EIS/SEIS eligible)
You want to build business credibility with larger clients
You plan to employ staff (access Employment Allowance)
You want tax-efficient benefits (company phone, training, low-emission car)

Non-tax factors to consider

Liability protection: Sole trader: Unlimited personal liability | Ltd: Limited to company assets (directors can still be liable for misconduct)
Credibility: Sole trader: Good for trades/services | Ltd: Better for B2B, professional services, contracts
Access to funding: Sole trader: Limited (no EIS/SEIS) | Ltd: Eligible for EIS/SEIS tax-advantaged investment
Pension contributions: Sole trader: Personal contributions up to £60k | Ltd: Company contributions unlimited (if 'wholly and exclusively' for business)
Accounting costs: Sole trader: £100-300/year | Ltd: £500-1,500/year + filing fees

When to switch from sole trader to limited company

The optimal crossover point is typically around £50,000 annual profit. At this level, tax savings outweigh the additional accounting costs and compliance burden.

Before you switch, consider:

VAT registration timing: Changing structure resets your 12-month rolling calculation (£90,000 threshold)
Asset transfer: Moving goodwill, stock, or premises to your company may trigger tax
Existing contracts: May need to novate (transfer) contracts to the new company
Professional advice: Get accountant advice on optimal timing and structure

Calculate your expected profits

Estimate annual turnover minus expenses. If under £30k, stay sole trader. If over £50k, consider incorporating.
Consider your liability exposure

High-risk activities (construction, professional services) benefit more from limited liability protection.
Factor in accounting costs

Limited company accounts cost £500-1,500/year more. Ensure tax savings exceed this.
Think about growth plans

If seeking investment or planning to employ staff, a limited company offers more flexibility.
Get professional advice

An accountant can calculate your specific tax position and recommend optimal structure.

Help choosing a structure

Resources to help you decide which business structure is right for you.

Set up a business
Compare business structures and get started.
GOV.UK
Self-employed National Insurance rates
Current Class 2 and Class 4 NI rates and thresholds.
GOV.UK
Corporation Tax rates
Current Corporation Tax rates (19% small profits, 25% main rate).
GOV.UK
Tax on dividends
How dividends are taxed and the £500 dividend allowance.
GOV.UK

Business Context Testing

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Guvnor

Sole trader or limited company

Quick comparison

Formation costs

Tax comparison at different profit levels (2025/26)

National Insurance comparison (2025/26)

Sole trader NI

Limited company NI

Decision matrix: which structure is right for you?

Choose sole trader if:

Choose limited company if:

Non-tax factors to consider

When to switch from sole trader to limited company

Before you switch, consider:

Calculate your expected profits

Consider your liability exposure

Factor in accounting costs

Think about growth plans

Get professional advice

Compliance Assistant

🧪 Business Context Testing

◉ Content Graph

Quick comparison

Formation costs

Tax comparison at different profit levels (2025/26)

National Insurance comparison (2025/26)

Sole trader NI

Limited company NI

Decision matrix: which structure is right for you?

Choose sole trader if:

Choose limited company if:

Non-tax factors to consider

When to switch from sole trader to limited company

Before you switch, consider:

Calculate your expected profits

Consider your liability exposure

Factor in accounting costs

Think about growth plans

Get professional advice

Related guides in Business Structure

Business Context Testing

Content Graph