Choosing between sole trader and limited company is one of the first decisions every new UK business owner faces. Most people focus on tax savings, but the running costs of each structure are just as important and often overlooked. Accountancy fees, filing obligations, insurance requirements and software subscriptions all add up differently depending on which route you take.
This guide strips out the theory and focuses on real 2026 pound figures for both structures. Whether you are a freelancer wondering if incorporation is worth it, or a startup founder weighing up liability protection against paperwork costs, the numbers below will give you a clear picture of what you will actually spend each year just to keep your business legally compliant and running.
A sole trader can run their business for as little as £200 to £600 per year in accountancy and admin costs, assuming basic bookkeeping and a straightforward Self Assessment return. A limited company typically costs £1,200 to £3,500 per year in accountancy, filing fees, confirmation statements and additional compliance, before you factor in payroll or dividend admin. The gap narrows as turnover grows and a good accountant can offset some costs through tax efficiency, but the raw admin cost of a limited company is roughly three to five times higher than for a sole trader.
What Does It Actually Cost to Set Up Each Structure?
The first cost difference appears before you have even traded a single pound. Setting up as a sole trader is free. You simply register with HMRC for Self Assessment, which costs nothing and takes about fifteen minutes online. There are no filing fees, no formation documents and no registered office requirement.
Incorporating a limited company through Companies House costs £50 if you file online directly, or £71 for the same-day service. Most accountants and formation agents charge £50 to £200 to handle the process on your behalf, which includes drafting the memorandum and articles of association and setting up the share structure. Some add registered office services on top of that.
| Setup Task | Sole Trader | Limited Company |
|---|---|---|
| Registration fee | £0 | £50 to £71 |
| Formation agent or accountant setup fee | £0 | £50 to £200 |
| Registered office service (first year) | £0 | £50 to £120 |
| Business bank account setup | £0 to £50 | £0 to £75 |
| Total one-off setup cost | £0 to £50 | £100 to £466 |
Annual Accountancy Fees: The Biggest Ongoing Difference
Accountancy is where the cost gap becomes most visible. A sole trader with straightforward income, perhaps a freelancer or tradesperson with one income stream, will typically pay £200 to £600 per year for a basic Self Assessment return prepared by a qualified accountant. If your affairs are genuinely simple, some online accountancy services will handle this for as little as £150 per year.
A limited company requires considerably more work from its accountant. You need annual statutory accounts prepared to Companies Act standards, a Corporation Tax return filed with HMRC, a confirmation statement filed with Companies House each year, and director Self Assessment returns on top of that. Many directors also run payroll through the company and pay themselves dividends, each of which adds further compliance work. Expect to pay £1,000 to £2,500 per year for a small limited company with a single director and simple structure. Companies with employees, VAT registration or more complex affairs will pay £2,000 to £4,500 per year.
| Accountancy Task | Sole Trader Annual Cost | Limited Company Annual Cost |
|---|---|---|
| Self Assessment tax return | £150 to £500 | £150 to £350 (director return) |
| Statutory accounts preparation | Not required | £400 to £900 |
| Corporation Tax return (CT600) | Not required | £200 to £500 |
| Confirmation statement filing | Not required | £34 (Companies House fee) |
| Payroll administration | Not required | £200 to £600 |
| Dividend paperwork and board minutes | Not required | £100 to £300 |
| Total annual accountancy and compliance | £150 to £600 | £1,084 to £2,684 |
Software and Bookkeeping Costs
HMRC's Making Tax Digital programme means most businesses now need accounting software. For sole traders, the requirements are lighter. If your turnover is below the VAT threshold (currently £90,000), basic software such as a spreadsheet or a low-cost tool like FreeAgent's free plan via certain banks will suffice. Paid plans on Xero, QuickBooks or Sage typically cost £14 to £33 per month for sole trader level access, or £168 to £396 per year.
Limited companies generally need a more comprehensive plan to handle payroll, dividends and statutory accounts. Xero's standard plan costs around £33 per month, QuickBooks Essentials around £30 per month, and Sage Business Cloud from £25 per month. Add payroll modules and expect to pay £360 to £600 per year in software costs alone. Some accountants include software licences in their fees, so always ask before signing up separately.
- FreeAgent: Free with certain business bank accounts such as NatWest or Royal Bank of Scotland. Covers sole trader and limited company needs at no extra cost if eligible.
- Xero Starter (sole trader): Around £16 per month in 2026, suitable for low volume businesses with limited invoices.
- Xero Standard (limited company): Around £33 per month, supports unlimited invoices and basic payroll.
- QuickBooks Simple Start: Around £14 per month, adequate for most sole traders with straightforward income.
- Sage Accounting Start: Around £15 per month, covers invoicing and basic tax reporting for sole traders.
Insurance Cost Differences Between Structures
Business insurance requirements differ between the two structures, though the difference is often overstated. A sole trader carries unlimited personal liability, meaning their personal assets are at risk if a client claims against them. This makes professional indemnity and public liability insurance essential rather than optional. A single director limited company still needs the same core policies, since limited liability only protects against business debts and does not shield you from professional negligence claims personally in all circumstances.
Where limited companies do spend more is on employers liability insurance. As soon as the company takes on a single member of staff, this becomes a legal requirement with a minimum cover of £5 million. Premiums range from £60 to £250 per year for a small business. Sole traders without employees do not need this at all. Directors and officers liability insurance, typically £150 to £400 per year, is also more commonly purchased by limited companies.
- Professional indemnity insurance: £150 to £900 per year for both structures depending on turnover and sector.
- Public liability insurance: £80 to £300 per year for most small businesses regardless of structure.
- Employers liability (limited companies with staff): £60 to £250 per year per employee band.
- Directors and officers liability: £150 to £400 per year, mainly relevant to limited companies.
Tax Costs and Savings: Where the Sums Can Flip
Running costs alone do not tell the whole story. The reason many people incorporate despite the higher admin costs is the potential tax saving, which can more than cover the additional expense once profits reach a certain level. As a sole trader, all profits are taxed as income at 20 percent for basic rate and 40 percent above £50,270 in 2026. You also pay Class 4 National Insurance at 6 percent on profits between £12,570 and £50,270, and 2 percent above that.
A limited company pays Corporation Tax at 19 percent on profits up to £50,000 (the small profits rate in 2026). A director can pay themselves a small salary (up to the National Insurance threshold, around £9,100 per year) and take the rest as dividends taxed at 8.75 percent for basic rate taxpayers. For many people with profits of £40,000 to £80,000 per year, this arrangement saves £2,000 to £6,000 annually in tax compared to operating as a sole trader. That saving typically outweighs the additional admin costs of incorporation, which is why the decision is rarely purely about running costs.
Bank Account Costs by Structure
Sole traders are not legally required to have a separate business bank account, though it is strongly advisable for tax purposes. Challenger bank accounts from Starling, Monzo Business and Tide cost nothing or very little for basic plans. Traditional high street accounts from Barclays, HSBC or Lloyds charge £6 to £12 per month for sole trader accounts, or £72 to £144 per year.
Limited companies must have a separate business bank account in the company's name by law. Challenger options from Starling Business, Tide and Monzo Business start free and charge per transaction. Traditional business current accounts from Lloyds, NatWest and Barclays typically charge £6 to £12 per month for a basic account, rising to £25 per month for accounts with more features. Over a year, budget £72 to £300 per year for a limited company bank account depending on your transaction volumes and chosen provider.
Hidden and Ongoing Compliance Costs
Beyond accountancy and software, limited companies carry a range of smaller but real ongoing costs that sole traders simply do not face. The Companies House confirmation statement costs £34 per year filed online. Maintaining a registered office address if you do not want your home address on the public register costs £50 to £120 per year from a provider such as 1st Formations or Companies Made Simple. If you ever need to file changes to directors, share capital or your registered address, each change takes administrative time and sometimes professional fees.
Sole traders face almost none of this. Your name and address do not appear on a public register. You have no confirmation statement, no Companies House account and no statutory accounts obligation. The only mandatory filing is your annual Self Assessment return, with a £100 late filing penalty if you miss the 31 January deadline. For some business owners, the simplicity alone is worth staying unincorporated even if the tax savings might theoretically favour a company.
- Confirmation statement (limited company): £34 per year filed online with Companies House. Registered office service: £50 to £120 per year if you use a third party address.
- Companies House filings for changes: £8 to £20 per change filed online.
- Late filing penalty for accounts (limited company): £150 for up to one month late, rising to £1,500 for over six months late.
- Late Self Assessment penalty (sole trader): £100 fixed penalty for missing 31 January deadline.
Total Annual Running Cost Comparison
Adding everything together gives a realistic picture of what each structure costs per year once you are up and running. These figures assume a single operator with no employees, annual turnover under the VAT threshold and straightforward finances. Businesses with employees, complex invoicing or multiple directors will pay more under both structures.
| Annual Running Cost | Sole Trader | Limited Company |
|---|---|---|
| Accountancy and tax returns | £150 to £600 | £1,000 to £2,500 |
| Accounting software | £0 to £400 | £180 to £600 |
| Business bank account | £0 to £144 | £72 to £300 |
| Core business insurance | £230 to £1,200 | £380 to £1,850 |
| Companies House filings | £0 | £34 to £155 |
| Registered office service | £0 | £50 to £120 |
| Total estimated annual running cost | £380 to £2,344 | £1,716 to £5,525 |
When Does It Make Financial Sense to Incorporate?
The general rule used by most UK accountants in 2026 is that incorporation starts to make financial sense when your profits consistently exceed £30,000 to £35,000 per year. Below that level, the tax saving from the salary plus dividends strategy is modest, and the additional admin costs of running a company often wipe it out entirely. Above £50,000 in profit, the Corporation Tax and dividend route almost always wins on a pure numbers basis.
Other factors that push people towards incorporation regardless of profit level include the need for limited liability protection when working with contracts above £50,000, the requirement from certain clients or agencies to contract only with limited companies, and the intention to bring in co-founders or investors who will require a share structure. These are legitimate reasons to incorporate even when the numbers alone would favour staying as a sole trader.
Your Startup Kit
The core equipment most people need to get started. These are live Amazon search links so the pricing stays current.
- Accounting software subscription — check current prices on Amazon
- Receipt scanning app or hardware — check current prices on Amazon
- Laptop for admin and filing — check current prices on Amazon
- Printer and scanner for documents — check current prices on Amazon
- Fireproof document storage box — check current prices on Amazon
- Business stationery and folders — check current prices on Amazon
- Password manager subscription — check current prices on Amazon
As an Amazon Associate we earn from qualifying purchases. These are search links, not specific product endorsements.
A sole trader structure costs £380 to £2,344 per year to run in 2026, while a limited company typically costs £1,716 to £5,525 per year once accountancy, compliance, software and insurance are totalled up. The raw admin cost of a limited company is three to five times higher. However, for anyone earning consistent profits above £35,000, the tax savings available through the salary and dividend model usually more than cover that gap. If you are just starting out or earning below that threshold, staying as a sole trader is almost certainly cheaper in real cash terms and substantially simpler to manage.