Sole Trader or Limited Company: What Structure Should I Use After the Recent Budget?

Starting your own business is exciting, but one of the first big decisions you’ll face is whether to operate as a sole trader or set up a limited company. This choice can significantly impact your tax obligations, personal liability and overall business flexibility.

The recent UK budget introduced key tax changes that may influence this decision for many small business owners and startups. In this post, we’ll explore the pros and cons of each structure and help you decide which might suit your situation best.

What’s the Difference?

Before getting into the details, let’s cover the basics:

Sole Trader

As a sole trader, you’re self-employed. It’s the simplest setup and easy to operate, with minimal admin but there’s no distinction between you and your business. This means that all the money you make is yours but you are also personally responsible for your business’s debts.

Sole traders only need to pay income tax and make National Insurance contributions (NICs).

To set up as a sole trader, you just need to register for Self-Assessment with HMRC. You must register as a sole trader by the 5th October in the second year of your trading and failing to do so could result in fines!

Limited Company

If you set up a limited company, then it is a separate legal entity from you. The company owns its assets and is responsible for its debts. It offers more protection and financial security, as there’s less risk to you personally if the business fails. It also comes with added responsibilities, such as filing accounts.

Limited companies are subject to corporation tax as opposed to income tax and they must also pay employer’s NI where they have any employees. You may be surprised to find that you will have to pay this even when you are the only person working in your company (if you pay yourself a director’s salary, then you are regarded as an employee)!

If you receive a director’s salary, then you will also be personally liable for income tax and your own NICs. It may feel like you are paying tax twice because your company has to pay corporation tax on its profits and then you have to pay income tax on your salary but the good news is that salaries are tax-deductible, so it reduces your taxable profits before corporation tax is calculated.

You can also pay yourself dividends but these are not tax-deductible and must be paid from your company’s profits after corporation tax has been paid. You will have to pay dividend tax through your Self-Assessment tax return, but it is taxed at a lower rate than income tax.

You may also be subject to business rates depending on where you’re based and operate from.

If you want to set up your business as a limited company, you will need to register with both HMRC and Companies House.

It’s important to note that if your turnover exceeds £90,000, you’ll need to register for VAT regardless of structure. This is worth considering if your business is growing rapidly!

Sole Trader: Pros and Cons

The Good

  • Simple Setup and Admin: You can start operating as a sole trader quickly and with little paperwork. You’ll need to register with HMRC, keep basic records and file a Self-Assessment tax return once a year.
  • Lower Costs: There are no setup fees and ongoing costs, like accountancy fees, tend to be lower. This makes it an appealing choice for startups or side hustlers testing the waters.
  • No Corporation Tax:You do not have to pay corporate tax!
  • Full Control: You’re the boss and decision-making is straightforward with no rules to follow.
  • Privacy:You do not have to worry about your business details being made available to the general public.

The Not-So-Good

  • Personal Liability: There’s no separation between you and your business. If your business incurs debt, your personal assets are at risk.
  • Tax Efficiency: Sole traders pay income tax and NICs on profits. This means there are fewer opportunities to reduce your tax liability and with higher rates for individuals earning over £50,270 (as at 2023/2024), this structure can be less tax efficient as profits grow.
  • Perception: Limited companies often appear more professional and credible to clients and investors, which can be a disadvantage for sole traders in some industries, as it could mean they miss out on certain opportunities.
  • Finance Options: It can be more difficult to secure finance for your business, as many banks and lenders will not lend to sole traders as they don’t want to take the risk.

Limited Company: Pros and Cons

The Good

  • Limited Liability: A key advantage is the protection this structure offers. If the business runs into trouble, your personal assets are usually safe (as long as no personal guarantees are given) and it’s only the money you put into the business that is at risk.
  • Tax Efficiency: Recent changes aside, limited companies can still offer tax savings. Owners can pay themselves through a mix of salary and dividends, which can reduce NICs.
  • Professional Image: Operating as a limited company can enhance credibility and make it easier to secure contracts, funding or partnerships. You also know your company name is legally protected and cannot be used by another business.
  • Growth Opportunities: Limited companies allow for easier scaling, whether by bringing in investors, issuing shares or securing loans.

The Not-So-Good

  • Higher Admin Burden: You’ll need to register with Companies House, file annual accounts and adhere to more regulatory requirements. This means additional time and money spent on admin.
  • Complex Tax Rules: The tax structure of limited companies can be complicated leading to increased costs.
  • Public Transparency: You have to register your limited company with Companies House and this means your personal and business information will be publicly available online, including whether it’s thriving or (just about) surviving!
  • Increased Costs: From accountancy fees to filing charges, running a limited company can cost more than being a sole trader.

How Recent Changes Impacts Your Choice

Changes in recent years together with the latest budget affects tax rates, thresholds and reliefs, which impacts how much of your hard-earned income you keep:

  1. Corporation Tax: As of April 2023, companies with profits over £250,000 pay 25% corporation tax. Businesses with profits below £50,000 pay 19%, with a sliding scale in between. While this makes sole trader status more appealing for small businesses with modest profits, the tax-efficient mix of salary and dividends can still make limited companies attractive for higher earners.
  2. Dividend Tax: Dividend allowance reductions are another blow for limited company owners. The tax-free dividend allowance dropped to £1,000 in April 2024 and will halve to £500 in April 2025. For many, this change has narrowed the gap between the two structures in terms of tax efficiency.
  3. NICs: Sole traders pay NICs on profits, while limited company owners can reduce NIC liabilities by taking a lower salary and dividends. Changes around NICs are set to take effect from 6th April 2025 though, which will impact the employer NICs limited companies have to pay:
  • Employers’ NICs will increase from 13.8% to 15%.
  • The threshold where employers pay employers’ NICs on each employee’s salary is reducing from £9,100 to £5,000 a year.
  • The Employment Allowance will increase from £5,000 to £10,500.
  • The £100,000 eligibility threshold will be removed so that all eligible businesses can claim a greater reduction on their employers’ NICs bill.

It will likely mean higher employer NICs overall for businesses operating as limited companies.

How to Decide

Here are some key questions to help you weigh up your options:

How Much Profit Will You Make?

For profits under £50,000, staying as a sole trader is often simpler and more cost-effective. But as profits rise, the tax advantages of a limited company become more compelling.

Do You Need Liability Protection?

If your business involves risk (think construction, financial services, or product manufacturing) a limited company’s liability protection can be invaluable.

What’s Your Long-Term Plan?

Are you planning to scale up, hire employees or attract investors? If so, a limited company may be the better fit.

Can You Handle the Admin?

Be honest about how much time and money you’re willing to invest in compliance and paperwork. If you’re already stretched thin, setting up as a sole trader might be easier.

Final Thoughts

Deciding between sole trader and limited company status is a personal decision influenced by your business’s size, industry and goals. One size doesn’t fit all!

The recent UK budget has shifted the landscape, making it more important than ever to review your options.

If you’re unsure which structure is right for you, don’t hesitate to reach out.

Working with an accountant can save you time, stress, and money by helping you:

  • Understand how tax changes affect your specific situation.
  • Maximise deductions and allowances.
  • Plan for future growth and avoid common pitfalls.

Our team specialises in helping small businesses and startups navigate these decisions. Let’s find the structure that works best for you and keeps more money in your pocket.

Ready to get started? Contact us today for tailored advice.