Still a sole trader? Waiting for the “right time” to incorporate?
As an accountant, we can vouch that there are some very valid reasons for wanting to incorporate your business. However, tax probably isn’t one of them.
So what should you really know when choosing between a sole trader or limited company?
The tax maths (it’s not what you think)
Go back in time and it was almost always better from a tax perspective to organise your small business as a limited company. Now, however, that decision is much more nuanced because the tax savings simply aren’t there anymore.
Take a business making £60,000 in profits:
- As a sole trader, you’ll pay around £13,889 in tax. A limited company would pay around £14,278. That’s a £389 bigger tax bill for the limited company.
- Increase the business profits to £125,000 and the tax bill for a limited company is still higher than for a sole trader. Unless you can pay a wage to your partner, at which point the numbers shift.
Your circumstances will change the maths, so part of the answer is to take advice that reflects your personal situation.
But if tax isn’t the reason to think about incorporating, what is? Well, shocker I know, but there’s more to consider than just tax.
Need help working through the number?Get in touch, we can crunch them for you and help you make an informed decision. |
Making Tax Digital (MTD)
Sole traders now have to deal with quarterly reporting under the Making Tax Digital rules, which started in April 2026. Limited companies don’t.
So, if you’re earning over £50,000, you’re already in the MTD regime. This means that the admin gap between staying as you are and becoming a limited company has shrunk considerably.
| Want to know more about MTD? Here’s a few more from us:You’re going digital, like it or not: What software for Making Tax Digital actually works?What does Making Tax Digital (MTD) mean to you?MTD for Income Tax: What to Do If You’ve Had a Letter from HMRC |
The liability question
Sole traders don’t think about this until it’s too late: there’s no legal separation between you and your business. If a client sues you, a supplier chases a debt, or something goes wrong, your personal assets are on the line. That means your house, your savings…everything.
A limited company on the other hand, is a separate legal entity. This means your liability is limited to what you’ve put in, which can be as little as £1, so if the business hits trouble, your personal assets are protected.
We don’t say this to scare you and this isn’t about being paranoid; it’s about sensible risk management. The bigger your business gets, the more exposed you are as a sole trader.
Ownership advantages
A sole trader has just one owner. Yes, you could form a partnership, but a limited company allows you to do more in terms of ownership.
A limited company has shareholders, and like the name suggests, they each have a share of the business. It’s possible to spread ownership more widely, and the company’s limited liability means you’re not also giving shareholders a personal risk.
What about future growth?
A lot of small businesses never grow much. They might make a good profit, but at the end of the day, it’s enough for one person and that’s all. If you have ambition to grow, bring in investment, or eventually sell, then a limited company is probably the best route to take.
If you’re early on in your business journey, you should spend some time thinking about this big picture. Why? Because when deciding between sole trader or limited company, your future plans matter as much as your current situation.
Credibility
It’s no surprise that operating as a limited company makes you look more established. Some clients – especially larger ones – won’t work with sole traders at all, whether for IR35 reasons or their own procurement policies. So this is worth keeping in mind when making your decision.
If you’re planning to grow, bring in investment, or eventually sell the business, a limited company structure is essential. Going sole trader to limited company early means you’re building equity and value from day one, not scrambling to restructure when opportunity knocks.
But isn’t incorporation complicated?
This is the objection we hear most. “I’ll have to file accounts at Companies House.” “There’s more admin.” “It sounds like a hassle.”
In practice? If you’re working with an accountant (and you should be), we handle most of it. Annual accounts, confirmation statements, corporation tax returns…you name it, we do it, and you’ll barely notice.
Yes, since 2024 there’s identity verification for directors. But it’s a one time thing, it’s straightforward if you have the right ID documents, and we can take care of it for you.
Incorporation really is easier than ever before. And with MTD now requiring quarterly reporting for sole traders over £50k, the accountancy costs for staying unincorporated aren’t that different from running a limited company anymore.
Get professional advice
Going sole trader to limited company isn’t as complicated as you think, so if you’re thinking about making the switch, now is the time to find out more. There’s no perfect time to incorporate, but with MTD changing the landscape, 2026 is as good a time as any to make the call.
Want to know whether a sole trader or limited company is right for you? Book a discovery call and let’s talk it through. |
