Tax efficiency
A limited company lets you draw a small salary (below the National Insurance threshold) and take the rest as dividends, which are taxed at a lower rate than income.
Sole trader vs limited company
Should I go limited?
It is one of the most common questions we hear from growing businesses in North Devon. There is no single right answer — but understanding the key differences will help you make the decision that is right for you.
The basics
Why it matters
As a sole trader, your business and personal finances are legally the same thing. That simplicity is great when you are starting out, but as your income grows it can mean a higher tax bill and greater personal financial risk.
Incorporating as a limited company creates a separate legal entity. That separation can bring tax advantages, limited liability protection and a more professional image — but it also comes with more administration and reporting obligations.
Side by side
Key differences at a glance
Sole trader
- Simple to set up — just register with HMRC
- Pay Income Tax and Class 4 National Insurance on profits
- Personally liable for any business debts
- Less paperwork and lower admin costs
- Profits taxed at your personal Income Tax rate (up to 45%)
Limited company
- Register with Companies House — more initial admin
- Pay Corporation Tax on profits (currently 19–25%)
- Personal assets protected from business debts
- Annual accounts and confirmation statement required
- Can be more tax-efficient above a certain profit level
Tax calculator
Sole trader or limited company?
Put in what your business makes in a year before you're paid, and see how the tax compares between the two structures for the 2026/27 tax year.
£
£10,000£200,000
£1,406 a year better off as a sole trader
At this profit level, staying a sole trader keeps more in your pocket than incorporating would, once employer's National Insurance and dividend tax are both accounted for.
Sole trader
Better offIncome tax£7,486
Class 4 National Insurance£2,246
Total tax£9,732
You keep
£40,268
Limited company
Employer's National Insurance£1,136
Corporation tax£6,896
Dividend tax£3,107
Total tax£11,138
You keep
£38,862
How this is worked out. Sole trader figures use the 2026/27 Income Tax bands (20% / 40% / 45%) and Class 4 National Insurance (6% / 2%) on the full profit. Limited company figures assume a director's salary of £12,570, employer's National Insurance on that salary above the £5,000 threshold with no Employment Allowance, 2026/27 Corporation Tax with marginal relief between £50,000 and £250,000, and the rest of the profit paid out as dividends and taxed at 2026/27 dividend rates (10.75% / 35.75% / 39.35%, £500 allowance). It assumes no other income, England, Wales or Northern Ireland rates, and a business run by one owner-director. Real numbers vary with expenses, pension contributions and personal circumstances.
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Timing
When does going limited start to make sense?
There is no magic number, but many accountants suggest considering incorporation once your profits consistently exceed around £30,000–£40,000 per year. At that level the Corporation Tax rate and the ability to split income between salary and dividends can result in a meaningfully lower overall tax bill.
Every situation is different. The right threshold depends on your personal circumstances, other income, pension contributions and future plans for the business.
Decision factors
Things to weigh up
Limited liability
If the business runs into financial difficulty, your personal assets — your home, savings — are generally protected. As a sole trader they are not.
Admin and costs
Running a limited company means annual accounts filed at Companies House, a Corporation Tax return, and potentially payroll. These are manageable — but they do add cost and time.
Credibility
Some clients and larger businesses prefer to work with limited companies. It can open doors, particularly if you work in contracting or professional services.
Making Tax Digital
MTD for Income Tax affects sole traders and landlords. If you are already dealing with quarterly reporting, the additional compliance of a limited company may feel less daunting.
Future plans
Thinking about taking on employees, seeking investment or eventually selling the business? A limited company structure is usually easier to scale and transfer.
Not sure which is right for you?
We help North Devon businesses work through exactly this decision every day. Book a free, no-obligation chat and we will give you an honest view based on your actual figures.