This is one of the first questions anyone asks when they start a business in the UK. The answer is not as simple as "one is always cheaper than the other." It depends on how much you earn, what you spend on running the business, and how long you plan to keep going.
We have broken this down into the real costs at every stage, from setup to annual running costs, using the actual 2026/27 tax year figures. No theory, no hypotheticals. Just the numbers.
A sole trader is cheaper to set up and run if your annual profits are below £30,000 to £40,000. Above that level, a limited company usually works out cheaper because you can pay yourself through a mix of salary and dividends, which is taxed at lower rates. But the limited company route comes with higher accountancy costs and more admin.
Setup Costs: Side by Side
Getting started as a sole trader costs less in every category. That is not debatable.
| Expense | Sole Trader | Limited Company |
|---|---|---|
| Registration | Free (HMRC) | £100 (Companies House) |
| Business bank account | £0 (optional, free accounts available) | £0 (essential, free accounts available) |
| Accountant setup | £0 (optional) | £0 to £200 (strongly recommended) |
| Registered office address | N/A | £0 to £80/year |
| Total setup cost | £0 | £100 to £380 |
If you want the full details on the sole trader registration process, our guide to sole trader registration costs covers every step. For limited company specifics, see our limited company startup cost guide.
Annual Running Costs
This is where the gap widens. A sole trader has very few mandatory costs. A limited company has filing obligations and practically requires an accountant.
| Annual Expense | Sole Trader | Limited Company |
|---|---|---|
| Accountant | £0 to £400/year | £500 to £1,500/year |
| Companies House confirmation statement | N/A | £50/year |
| Accounting software | £0 to £180/year | £180 to £420/year |
| Registered office address | N/A | £30 to £80/year |
| Insurance | £50 to £300/year | £50 to £300/year |
| Typical total running cost (excl. tax) | £100 to £880/year | £810 to £2,350/year |
The biggest difference is the accountant. A sole trader with simple finances can file their own Self Assessment for free. A limited company director needs to file annual accounts, a corporation tax return, and often run payroll. That is significantly more work, and doing it wrong carries penalties. Most limited company directors spend between £500 and £1,000 per year on an accountant, and it is money well spent.
Tax: Where It Gets Interesting
The tax differences are the main reason people switch from sole trader to limited company. Here is how each structure is taxed for the 2026/27 tax year.
Sole Trader Tax
As a sole trader, you pay income tax and National Insurance on all your business profits.
- Income tax: 0% on the first £12,570, 20% on £12,571 to £50,270, 40% on £50,271 to £125,140
- Class 2 NI: £3.45/week (£179.40/year) if profits above £12,570
- Class 4 NI: 6% on profits between £12,570 and £50,270, then 2% above £50,270
Limited Company Tax
A limited company pays corporation tax on its profits. As a director, you then pay yourself through a combination of salary and dividends, each taxed differently.
- Corporation tax: 19% on profits up to £50,000, 25% on profits above £250,000, with marginal relief in between
- Director salary: Typically set at the NI threshold (£12,570) to avoid NI contributions
- Dividend tax: 10.75% (basic rate), 35.75% (higher rate), 39.35% (additional rate) from April 2026
- Dividend allowance: First £500 of dividends is tax free
Real Tax Comparison at Different Profit Levels
This is the table that matters. We have calculated the approximate total tax bill for both structures at common profit levels for the 2026/27 tax year. The limited company figures assume the director pays themselves a salary of £12,570 and takes the rest as dividends.
| Annual Profit | Sole Trader Total Tax | Ltd Company Total Tax | Saving with Ltd |
|---|---|---|---|
| £20,000 | £2,145 | £2,250 | -£105 (sole trader cheaper) |
| £30,000 | £4,710 | £4,400 | £310 |
| £40,000 | £7,310 | £6,050 | £1,260 |
| £50,000 | £9,910 | £7,750 | £2,160 |
| £60,000 | £13,710 | £10,100 | £3,610 |
| £80,000 | £21,710 | £15,900 | £5,810 |
At £20,000 profit, the sole trader pays less tax overall because the limited company's accountancy costs and corporation tax outweigh any dividend tax savings. By £30,000, the limited company starts to pull ahead. At £50,000 and above, the tax savings are significant enough to comfortably cover the extra running costs of a limited company.
These figures are approximations based on the 2026/27 tax year rates. Your actual position will vary depending on your allowable expenses, other income, pension contributions, and your accountant's specific tax planning strategy. Always speak to an accountant before making the switch.
Insurance Differences
The type of insurance you need does not change based on your business structure. A sole trader plumber and a limited company plumber both need public liability insurance. The premiums are generally the same regardless of whether you are a sole trader or a limited company.
The one difference is that limited companies can more easily claim insurance premiums as a business expense through the company accounts, though sole traders can also claim insurance as an allowable expense against their Self Assessment. For the specifics, our public liability insurance cost guide covers the typical premiums.
Other Differences That Affect Cost
| Factor | Sole Trader | Limited Company |
|---|---|---|
| Personal liability | Unlimited. Your personal assets are at risk. | Limited to company assets. Personal assets protected. |
| Admin time | Low. One tax return per year. | Higher. Annual accounts, CT return, confirmation statement, payroll. |
| Privacy | Your name and address are not on a public register. | Director details and registered office are on Companies House (public). |
| Credibility | Some clients prefer to work with limited companies. | Can look more established to larger clients. |
| Pension contributions | Personal pension contributions reduce your income tax. | Company pension contributions are a tax deductible business expense (corporation tax saving). |
When to Switch from Sole Trader to Limited Company
There is no magic number, but there are clear signals that it is time to consider the switch.
- Your annual profits consistently exceed £30,000 to £40,000. This is the point where the tax savings start to outweigh the extra costs.
- You want to protect your personal assets. As a sole trader, you are personally liable for all business debts. A limited company creates a legal separation between you and the business.
- Your clients require it. Some larger companies and public sector organisations will only work with limited companies, not sole traders.
- You want to bring on a business partner. Limited companies make it much easier to share ownership through issuing shares.
- You are hiring employees. Running payroll through a limited company is more tax efficient than hiring as a sole trader in most cases.
For a broader view of all the costs involved in getting started, see our complete guide to UK business startup costs.
Frequently Asked Questions
Is a limited company always cheaper than a sole trader?
No. A limited company has higher setup and running costs, including accountancy fees, Companies House filing fees, and more complex admin. It only becomes cheaper overall once your profits are consistently above £30,000 to £40,000 per year, because the tax savings outweigh the extra costs at that point.
Can I switch from sole trader to limited company?
Yes. You can switch at any time. You will need to register a new company with Companies House, open a business bank account, and inform HMRC. Your accountant can handle the transition and advise on the best timing to minimise your tax bill during the changeover.
Do I need an accountant for a limited company?
Legally, no. But in practice, almost all limited company directors use an accountant. The filing requirements are more complex than Self Assessment, and a good accountant will save you more in tax than they charge in fees. Budget £500 to £1,500 per year.
What is the dividend tax rate in the UK for 2026?
From 6 April 2026, the dividend tax rates are 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. The tax free dividend allowance remains at £500 per year.
At what income level should I switch from sole trader to limited company?
Most accountants recommend considering the switch once your annual profits consistently exceed £30,000 to £40,000. At that level, the tax savings from paying yourself through a salary and dividend combination typically outweigh the extra accountancy and admin costs of running a limited company.