Self Employed vs Limited Company - What’s Best?

No feeling compares to taking the leap to start your own business. Financial freedom, flexible working hours and the ability to build a culture you care about - the list of benefits is endless. From doing your research, you’ll know there are several big decisions you’ll need to make as a business owner - and we’re not just talking about the paint colours of your new office. You’ll need to decide on the structure of your new business, and weigh up the pros and cons of a self employed vs limited company. 

Below, we’ll uncover the difference between a sole trader and limited company, so you can figure out which business structure works best for your new venture.  

What’s the difference between a sole trader and a limited company?

While operating as a sole trader or limited company won’t change your role as a business owner, there are numerous differences to consider when you compare limited company vs self employed in the UK. 

We’ve put together this table to outline the differences between a sole trader and limited company, so you can match your needs to a business structure that works for you.

Tax differences between self-employed and a limited company

A key difference between becoming self-employed and forming a limited company is  tax. 

Below, we’ll explore some of the tax implications of a self employed vs limited company.

Tax if you’re a sole trader

As a sole trader, you’re responsible for keeping on top of your taxes. How much tax you pay will depend on the profit you make and how much income you earn each financial year (which runs April-April). Once your income exceeds the tax-free personal allowance threshold, which is £12,570, you’ll need to pay tax on anything you earn over that amount. Sole traders pay between 20-45% income tax, whereas limited companies pay only 19% corporation tax, making them more tax efficient.

Those who are self-employed are also required to pay National Insurance Contributions (NICs) and the class you pay depends on the profit you make. If you make a profit of £6,725 or more a year, Class 2 contributions are treated as having been paid to protect your NI record, so you don’t need to pay Class 2 contributions. If you earn less than this a year, you don’t need to pay anything but can choose to make voluntary Class 2 contributions to protect your NI record, so you qualify for certain benefits and the state pension.

Make more than £12,570 a year? You’ll need to pay Class 4 Contributions, which for the 2o24-25 tax year are as follows:

• 6% on profits of £12,570 up to £50,270

• 2% on profits over £50,270

  
  

How much can you earn self-employed before paying tax?

You’ll pay tax on anything you earn over the standard Personal Allowance, which for the 2024/25 tax year is £12,570. 

Tax if you’re a registered limited company

As a limited company, you’ll pay corporation tax, which is typically less than the income tax you’d pay as a sole trader. If your business made more than £250,000, you’ll pay the main rate of corporation tax which is 25%. If your company’s profits were £50,000 or less, you’ll pay the small profits rate of 19%. As a company director, you may choose to pay yourself a mix of salary and dividends, meaning your salary amount is smaller, and in turn, you’ll pay less tax. Dividends are taxed at a lower rate, allowing you to maximise your take-home pay. This method also lowers the amount of National Insurance you’ll pay.

As the director of your limited company, you’ll pay two types of National Insurance contributions - the company itself will pay NIC as an employer, and you’ll also pay it on your salary. You’ll be responsible for paying National Insurance through HMRC’s PAYE (Pay as You Earn) system, as part of your business’ payroll. 

Limited companies are also required to file annual reports to Companies House, which become available to the public. These accounts include details on your profits and losses, a balance sheet, a director’s report, an auditor’s report and your name and signature.

VAT

Whether you’re a sole trader or limited company, you’ll need to register for value added tax (VAT) if your turnover goes over £90,000 - the VAT threshold. You can also choose to register for VAT if your turnover is less than £90,000, known as voluntary registration.

Currently, in the UK, the rate of VAT is 20%. A good way to think of it is your business isn’t paying VAT - instead, you’re charging your customer, for you to then pay HMRC. You’ll then complete a VAT tax return, usually quarterly, to let HMRC know how much VAT you’ve charged. You’ll need to include your total sales and purchases, the amount of VAT you owe, the amount of VAT you can reclaim and the amount of VAT HMRC owes you. You can submit your VAT return using compatible accounting software, through an agent or accountant, or by using your online VAT account. 

Could I change from a sole trader to a limited company?

You have the freedom to operate as a sole trader initially while you find your feet, and later decide to register your business as a limited company. Just because you started out as a sole trader, it doesn’t mean you can’t change your mind further down the line.

Changing from a sole trader to a limited company could shield you from financial risk. This is because a limited company is treated as a separate legal entity from its director, meaning you won’t be personally liable should your business suffer financially. 

You may also benefit financially when it comes to business tax. Rather than paying between 20-45% income tax, you’ll pay corporation tax at 19%. As a director, you can also choose to take home a smaller salary and receive your additional income as dividends to help lower your tax bill.

There are further benefits to registering as a limited company including:

Greater pension options

As a sole trader, you’ll only be eligible for a personal pension and you can’t deduct your pension contributions as an expense of your business. This means your contributions will need to come from your take-home pay after tax. You’ll still be eligible for the State Pension as long as you have ten qualifying years on your National Insurance record to get any state pension, and at least 35 years to receive the full State Pension. 

Operating as a limited company can unlock greater pension options. Your pension contributions can be treated as an allowable business expense if the payments are ‘wholly and exclusively’ for the purposes of the profession, trade or vocation. What does this mean exactly? Well, you can offset the pension contributions against your business profits and in turn reduce your corporation tax bill. 

As a limited company, you may also have the chance to join or provide a small self-administered scheme, known as an SSAS pension - a type of workplace pension that is independently managed by the company that sets it up. 

Reduced risk of personal insolvency

As we mentioned earlier, as a limited company you have the legal protection that should your business face financial difficulties, you won’t be personally affected. This is known as limited liability, which protects you should your business ever struggle with debts, financial losses or liabilities, the business itself is responsible for them - not you individually. This is because, in the eyes of the law, your business is classed as an ‘individual’ and separate legal entity. 

You could sell your business 

You never know what the future holds - one day you may feel ready for something new and choose to sell your limited company. Remember, if you have more than one owner, all shareholders will need to agree to the sale first. You may also need to pay capital gains tax if you make a ‘capital gain’ when selling your business. 

Weighing up your options to form a company

Deciding which business structure suits you best can feel tricky, especially when you consider the differences between a sole trader and limited company.  To help you weigh up your options, we’ve put together this comparative table comparing a self employed vs limited company. 

Let SUAZ help you on your business journey

If you’re looking to start your own business, there’s no reason to wait. Why not let SUAZ help you on your road to success? We can help you form your limited company and even take care of the registration fee, completely free of charge. Apply to form your company and reap the rewards you deserve.