Your accountant keeps telling you to go limited. Your mate who's a spark says he saves a fortune on tax through his limited company. Meanwhile you've been sole trader for six years and it's been fine. So what's the actual difference and does it really matter?
The short answer: it depends on how much you're earning. The longer answer involves tax thresholds, dividend allowances, and a bit of paperwork. Let's go through it properly.
How Sole Trader Tax Works
As a sole trader, your business income is your personal income. It all goes on your Self Assessment tax return and you pay income tax and National Insurance on your profits.
For the 2025/26 tax year, the numbers look like this. You get a £12,570 personal allowance — that's tax-free. Everything from £12,571 to £50,270 is taxed at 20%. Anything above £50,270 up to £125,140 is taxed at 40%. Then you've got Class 2 and Class 4 National Insurance on top.
So if you're a plumber making £45,000 profit, you're paying roughly £6,500 in income tax plus about £3,800 in National Insurance. Call it £10,300 total, leaving you with around £34,700 in your pocket.
How Limited Company Tax Works
A limited company is a separate legal entity. It pays Corporation Tax on its profits — currently 25% for profits over £250,000 and 19% for profits under £50,000, with marginal relief in between. Most one-person trade businesses fall into the 19% bracket.
Here's the clever bit. As a director, you pay yourself a small salary — usually around £12,570 to use up your personal allowance without triggering income tax. Then you take the rest as dividends, which are taxed at lower rates than salary: 8.75% for basic rate, 33.75% for higher rate.
Let's run the same £45,000 profit through a limited company. You pay yourself a £12,570 salary (no income tax, minimal NI). The company pays 19% Corporation Tax on the remaining profit. Then you take dividends from what's left. After all the sums, you're looking at roughly £8,200 in total tax — about £2,100 less than the sole trader.
When the Numbers Really Start to Diverge
At £45,000 profit, the saving is noticeable but not life-changing. Where it gets interesting is above £50,000.
Take a successful electrician earning £65,000 profit. As a sole trader, they're paying roughly £16,500 in tax and NI. Through a limited company with the salary-plus-dividends approach, they're paying around £12,800. That's £3,700 a year — enough for a decent family holiday.
At £80,000 profit, the gap widens further. You're looking at roughly £5,000–£6,000 a year in savings. At that level, going limited is almost certainly worth it, even after accountant fees.
Below £30,000 profit? The tax savings are minimal and probably don't justify the extra admin and accountant costs. Stick with sole trader.
The Admin Burden
This is the bit nobody enjoys talking about. A limited company comes with more paperwork. You'll need to file annual accounts with Companies House, submit a Corporation Tax return, run payroll for your salary, and keep proper company records.
As a sole trader, your obligations are simpler — one Self Assessment return per year, keep records of income and expenses, and that's largely it. Some sole traders do their own tax return. Very few limited company directors manage without an accountant.
Speaking of accountants: expect to pay £800–£1,500 a year for a limited company accountant, compared to £200–£500 for sole trader accounts. That extra cost eats into your tax savings, which is why the maths only works above a certain income level.
Liability Protection
Here's something that doesn't get enough attention. As a sole trader, you and your business are legally the same thing. If someone sues your business, they're suing you personally. Your house, your van, your savings — all potentially at risk.
A limited company creates a legal wall between you and the business. If the company gets sued or goes into debt, your personal assets are generally protected. For tradespeople doing high-value work — loft conversions, rewires, extensions — this protection is worth something.
That said, most tradespeople have public liability insurance which covers the same risks. And if you sign personal guarantees for business loans or credit accounts (which most lenders require from small companies), the liability protection is reduced anyway.
IR35 and Subcontracting
If you do subcontracting work — especially through agencies or for larger companies — IR35 is something you need to understand. These are rules designed to stop people working like employees but paying tax like company directors.
If HMRC decides your working arrangement looks like employment (they control when and how you work, you use their tools, you only work for them), they can treat your income as employment income and tax it accordingly. This wipes out most of the tax benefits of being limited.
For tradespeople who work for multiple customers, buy their own materials, set their own hours, and genuinely run their own business, IR35 is rarely an issue. But if you're essentially a full-time subbie for one main contractor, get proper advice before going limited.
When to Make the Switch
There's no magic threshold, but here's a practical guide. If your annual profit is consistently above £40,000–£45,000, it's worth getting a proper quote from an accountant to see what you'd save. Emphasis on "consistently" — one good year followed by a quiet one doesn't justify the switch.
Other triggers: you want the liability protection, you're looking to take on employees (easier through a limited company), or you're doing work for larger contractors who prefer dealing with limited companies.
The switch itself isn't complicated. Your accountant registers the company at Companies House, sets up a business bank account, and sorts the Corporation Tax registration. You can do it mid-year — you don't have to wait until April. Keeping clean records of income and expenses makes the transition easier, and tools like Gaffer can help you stay organised with job tracking and invoicing whether you're sole trader or limited.
What I'd Actually Do
If you're earning under £35,000 profit, stay sole trader. The simplicity is worth more than the small tax saving.
Between £35,000 and £50,000, get a proper quote from an accountant. Factor in their fees and the extra admin time. If you're still saving over £1,500 a year after accountant costs, it's probably worth it.
Above £50,000, go limited. The tax savings are meaningful, the liability protection is a bonus, and a good accountant will handle most of the extra paperwork for you.
Whatever you choose, the most important thing is keeping proper records. A shoebox full of receipts and a vague memory of what you earned last Tuesday isn't good enough for either setup. Get a system, stick to it, and your accountant — and your bank balance — will thank you.