Sole trader or limited company: which is right for your trade?
Sooner or later most tradespeople ask whether they should stop being a sole trader and set up a limited company. There is a lot of confident advice in the pub and on the internet, much of it out of date. Here is a straight look at the trade-offs so you can have a sensible conversation with your accountant.
Start with what you actually pay now. The free self-employed tax calculator shows your Income Tax and Class 4 National Insurance as a sole trader, and your effective rate — the figure worth having in front of you before you compare it with running a company.
The two ways of being in business
As a sole trader, you and the business are the same thing in law. It is quick and cheap to set up, the admin is light, and you pay Income Tax and National Insurance on your profit through Self Assessment. The downside is unlimited liability: if the business owes money, you owe money, and your personal assets are on the line.
A limited company is a separate legal person. You own it and usually run it, but its debts are its own, which is what limited liability means. You pay yourself with a mix of salary and dividends, the company pays Corporation Tax on its profits, and you take on more admin and more visibility.
The tax question
Corporation Tax is 19% on profits up to £50,000, rising through marginal relief to 25% on profits above £250,000. Taking money out as dividends rather than salary can be more tax efficient than a sole trader's Income Tax and National Insurance, particularly once your profits comfortably exceed what you need to live on.
But the gap has narrowed in recent years, and it only tends to pay off at higher profit levels. If you are drawing almost everything you earn just to get by, the saving is often small or nothing once you factor in the extra costs of running a company. The tax tail should not wag the dog.
What people forget to count
A limited company brings real costs and obligations that a sole trader does not have. You file annual accounts and a confirmation statement at Companies House, your company details and accounts become public, and your accountancy fees are usually higher because there is more to do. You also have to keep company money separate from your own and be disciplined about how you draw it.
On the other side, there are non-tax reasons a company can be worth it: protection for your personal assets if a job goes badly wrong, more credibility with commercial and larger clients who prefer to deal with a limited company, and the ability to leave profit in the business to save for a big purchase or a quiet season.
A note on CIS
If you work under the Construction Industry Scheme, going limited does not take you out of it. Your company still has CIS deductions taken from payments, but those deductions can be set against the company's own PAYE and other liabilities, which can help with cash flow compared with a sole trader waiting for a refund.
A reasonable rule of thumb
Many trades start as sole traders because it is simple, and look seriously at incorporating once profits are consistently well into the higher rate band and they are leaving money in the business rather than spending every penny. Liability worries, the type of clients you want, and your plans for growth all matter as much as the tax.
This is genuinely a decision worth paying an accountant to model for your own numbers, because the right answer depends on your profit, your drawings and your goals. An hour of proper advice usually pays for itself.
Related guides
Whichever route you take, clean records of your quotes, invoices and expenses make the decision easier to model and the ongoing admin lighter. That is what TradePilot is being built to give UK trades. Join the waiting list to be first in when we launch.
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