Sole trader or limited company: what's the difference?

Sole trader	Limited company
Setting up
Register with HMRC once you earn over £1,000 in a tax year	Set up with Companies House, separate from you
What you send each year
A Self-Assessment tax return	Annual Accounts, a Confirmation Statement, a Company Tax Return, and your own tax return if you take dividends
Also, if it applies
Quarterly updates once your income is over £50,000, and VAT returns once your turnover is over £90,000	VAT returns once your turnover is over £90,000
Keep your records for
5 years after the tax return's deadline	At least 6 years
Tax on your profit
Income Tax at 0% to 45%, plus National Insurance	Corporation Tax at 19% to 25%

Sole traders

A sole trader is a self-employed individual who works for themselves to make a profit (though they may also have employment on the side).

The majority of people starting a business set up as a sole trader as it is the simplest form of business to set up and run.

Sole traders can start trading straight away without registering if they wish to do so, but if they earn more than £1,000 in a tax year, they must register.

Upon registering, they will be required to file annual Self-Assessment tax returns before the 31st of January – this is usually the main (and only) form of tax compliance required of sole traders unless their taxable turnover crosses £90,000 – in which case they are obliged to also register for VAT.

They must also ensure they keep accurate, organised records of all business transactions for 5 years after the deadline of the tax return they relate to, in case of an HMRC investigation.

Setting up as a sole trader has the least admin work and tax compliance involved, however, it may not be the most tax efficient choice at higher levels of profit.

Limited companies

A limited company is a business structure which separates itself from the owner (unlike a sole trader, where the owner effectively is the business).

Because of this, a limited company must be set up separately with Companies House – the government database of limited companies.

As a limited company, you generally have more compliance than a sole trader. You must submit:

• Annual Accounts (includes a balance sheet and for some companies, a profit and loss statement)
• A Confirmation Statement (an annual check to confirm company details)
• A Company Tax Return (your profit calculation and how much Corporation Tax you owe)
• A Self-Assessment tax return (if you take dividends out of the business for yourself, you'll usually need to file a personal tax return to declare them)

Limited companies must also maintain detailed records of all transactions for a minimum of 6 years.

The Corporation Tax rates that limited companies are subjected to are different from the Income Tax bands on sole traders. It follows this structure:

Income Tax

• Personal Allowance (0%): Up to £12,570
• Basic Rate (20%): £12,571 to £50,270
• Higher Rate (40%): £50,271 to £125,140
• Additional Rate (45%): Over £125,140

Corporation Tax

• On your first £50,000 you are taxed at 19%.
• Then anything between £50,000 and £250,000 is taxed at 26.5%.
• And everything over £250,000 is taxed at 25%.

A limited company structure definitely involves more moving parts than a sole trader.

With that in mind, you could get away without the support of an accountant as a sole trader at lower income levels, but in order to run a business smoothly, without stress or any hiccups that could negatively impact operations, limited companies and sole traders with medium to high income should seek an accountant to protect their businesses.

This guide gives general information only. Tax rules change and every business is different, so speak to us before acting on it. Rules and figures checked in November 2026.