Sole Trader vs Limited Company: Which Is Right for You in 2025?
If you’re starting or growing a business in the UK, one of the first big decisions is whether to operate as a sole trader or form a limited company. Both structures are widely used, and both have benefits — but which is better depends on your income, risk profile, and long-term business goals.
In this guide, we’ll break down the key differences, including:
Taxes and take-home pay
Legal responsibilities
Costs and administration
Growth and funding potential
Pros and cons of each structure
What Is a Sole Trader?
A sole trader is the simplest business structure in the UK. It means you are self-employed and personally responsible for your business’s finances.
Key Features
Simple and quick to register with HMRC.
You keep all profits after tax.
You are legally responsible for debts and obligations.
Taxation
Sole traders pay Income Tax on profits through Self Assessment.
You also pay Class 2 and Class 4 National Insurance contributions (NICs).
Current (2025) tax rates for sole traders:
Basic rate: 20% (income £12,571–£50,270)
Higher rate: 40% (income £50,271–£125,140)
Additional rate: 45% (income above £125,140)
Example
If you earn £40,000 profit as a sole trader, after Income Tax and NICs your take-home will be around £30,000–£31,000 (depending on expenses claimed).
What Is a Limited Company?
A limited company is a separate legal entity from its owners (shareholders). This means your personal assets are protected if the company runs into financial trouble.
Key Features
Limited liability protects your personal assets.
Separate legal status: the company can own assets, take on contracts, and be sued.
You can be both a shareholder and a director.
Taxation
Companies pay Corporation Tax on profits (currently 25% for most small/medium companies).
You pay yourself via a salary and/or dividends:
Salary is subject to Income Tax and NICs.
Dividends are taxed at lower rates (8.75%, 33.75%, or 39.35% depending on your tax band).
Example
If your company makes £40,000 profit, after Corporation Tax (£10,000), you could pay yourself the remaining £30,000 as dividends — often resulting in lower overall tax than a sole trader at higher income levels.
Sole Trader vs Limited Company: Key Differences Explained
Setup: Sole traders are easy to set up by registering with HMRC. Limited companies require registration with Companies House, which involves more steps.
Legal liability: Sole traders have unlimited liability, meaning personal assets are at risk if the business fails. Limited companies offer limited liability, protecting personal assets.
Tax: Sole traders pay Income Tax and National Insurance on profits, while limited companies pay Corporation Tax, and directors can then extract income through a combination of salary and dividends.
Paperwork and compliance: Sole traders file a Self Assessment tax return each year. Limited companies must file annual accounts, Corporation Tax returns, and a Confirmation Statement.
Privacy: Sole trader finances remain private. Limited companies’ director and shareholder information is publicly available at Companies House.
Perception: Sole traders may appear smaller or less formal, while limited companies are often viewed as more professional and credible.
Growth and funding: Sole traders may find it harder to attract investment, while limited companies can issue shares and often find it easier to raise funding.
Advantages of Being a Sole Trader
Simple setup and low administration.
Lower costs — no Companies House fees and simpler accounting.
Full control with no shareholders to answer to.
Greater privacy as your accounts are not public.
Disadvantages of Being a Sole Trader
Unlimited liability means your personal assets are at risk if the business fails.
Less tax-efficient at higher income levels.
Harder to raise investment or attract larger clients.
Perception may be less professional compared to a limited company.
Advantages of a Limited Company
Tax efficiency through a combination of salary and dividends.
Limited liability provides protection for personal assets.
Greater credibility with clients, suppliers, and investors.
Easier to raise funding through investment or bank loans.
Growth potential with the option to add shareholders and reinvest profits.
Disadvantages of a Limited Company
More administrative work, including filing annual accounts, confirmation statements, and Corporation Tax returns.
Higher accountancy fees due to compliance requirements.
Reduced privacy, as director and shareholder details are on public record.
Dividends can only be paid from profits.
When Does It Make Sense to Switch to a Limited Company?
For many business owners, starting as a sole trader is easiest. But switching to a limited company often makes sense when:
Profits exceed £40,000–£50,000 per year.
You want to limit your personal liability.
You plan to hire staff or seek external investment.
You want to build a business brand that appears larger and more established.
Practical Example
Sole Trader earning £60,000 profit
Income Tax and National Insurance = approximately £18,000
Take-home = around £42,000
Limited Company earning £60,000 profit
Corporation Tax at 25% = £15,000
Remaining = £45,000 distributed as dividends
Dividend tax applies depending on your tax band
Take-home = around £46,000–£48,000
At higher income levels, the limited company structure usually results in higher net take-home pay.
The decision between sole trader and limited company in 2025 depends on your goals.
If you want simplicity, privacy, and low administration, starting as a sole trader makes sense.
If you want tax efficiency, limited liability, and room to grow, a limited company is often the better option.
Your choice doesn’t have to be permanent. Many businesses start as sole traders and switch to a limited company later as profits and ambitions grow.
For tailored advice, speak to an accountant who can model your take-home pay, tax savings, and growth options based on your specific circumstances.
