Sole Trader vs Limited Company: The Complete UK Tax Comparison for 2025/26

Companies House charges £12 for electronic incorporation (same-day) or £40 for postal applications. However, this is just the registration fee. The real cost is in the professional setup and ongoing compliance.

At LOYALS, we include company formation as part of our standard monthly service (£150 + VAT). There's no separate incorporation fee — we handle Companies House registration, HMRC notifications (Corporation Tax, PAYE, VAT if needed), and complete setup within your first month's fee. You're simply paying for ongoing accounting and advisory from day one, and we take care of the formation as part of getting you properly established.

Compare this to typical high-street accountants who charge £500-£1,500 as a one-off incorporation fee, then £150-£300+ monthly for accounting. Our approach is transparent: one fixed monthly fee, no surprise bills, and incorporation included.

Yes, absolutely. You can incorporate at any point during the tax year. You'll simply have a "split year" where you're a sole trader for part of the year and a limited company director for the remainder.

When you file your personal self-assessment, you'll declare sole trader income up to the date you incorporated (we'll provide this figure from your sole trader accounts). From the incorporation date forward, income goes through the company and you'll declare salary and dividends personally instead.

The company's first accounting period will run from its incorporation date to your chosen year-end (typically 5th April or 31st March). If you incorporate mid-year, your first company year-end will be less than 12 months, which is perfectly normal.

Timing tip: Many people incorporate at the start of a tax year (6th April) or calendar year (1st January) for clean accounting, but there's no requirement to do so. If the numbers support incorporating now, there's no benefit to waiting for a "round" date.

Yes, you should notify HMRC that you've ceased self-employment once the company starts trading. This is important because HMRC will continue to expect self-assessment tax returns and may issue late filing penalties if you don't formally close the sole trader status.

The notification is straightforward — we handle it as part of your incorporation. We inform HMRC of your cessation date (usually the day before the company starts trading), and they'll issue a final self-assessment calculation for your sole trader income up to that date. You'll still need to file a self-assessment return for that final period, but after that, your sole trader obligations end.

Important: You'll still file personal self-assessment returns going forward as a company director (to declare salary and dividends), but you won't be filing as self-employed anymore.

Existing contracts signed in your personal name (as a sole trader) don't automatically transfer to the limited company. Legally, the company is a separate entity, so contracts need to be novated (transferred) or new contracts signed.

In practice, this is usually straightforward. For most service-based businesses, you simply notify clients that you've incorporated and future work will be invoiced by the company. If clients are happy to continue (which they almost always are), you issue new invoices under the company name and they pay the company bank account. No formal contract novation needed for simple ongoing relationships.

For formal written contracts (construction projects, commercial agreements, retainer arrangements), you may need to either: (a) complete the existing contract as a sole trader and invoice personally until that project ends, then start new projects under the company, or (b) request a novation agreement where the client agrees to transfer the contract to the company. Most clients accommodate this if you're mid-project.

LOYALS provides template client notification letters and novation request templates as part of the incorporation process. We'll advise on the best approach for your specific client base.

Incorporating can actually improve your mortgage prospects, but the impact depends on timing and how you structure your income.

Lenders assess sole traders based on net profit shown in accounts (typically averaging the last 2-3 years). Limited company directors are assessed on salary plus dividends, and some specialist lenders will also consider retained profit in the company if it's substantial. For profitable businesses, this often increases borrowing capacity.

However, there's a timing consideration: most mortgage lenders require 1-2 years of company accounts before they'll lend to directors. If you incorporate and immediately apply for a mortgage, you may be treated as a newly self-employed director with no track record, which can limit options.

The strategy depends on your timeline. If you're planning to buy or remortgage in the next 6-12 months, it may be worth delaying incorporation until after the mortgage completes, especially if you're borderline on affordability. If you're 18+ months away from a mortgage application, incorporating now gives you time to build a company track record that will improve your lending position.

We work with specialist contractor mortgage brokers who understand limited company structures. If you're considering a mortgage soon, we'll coordinate with a broker to ensure you're incorporating at the optimal time and structuring income appropriately.

There's no legal limit — you can pay yourself as much as the company can afford. The question is how to structure that payment tax-efficiently between salary and dividends.

The typical structure for a small company director is a low salary (£5,000-£9,100 per year) plus dividends for the balance. The salary should be enough to qualify for state pension credits but low enough to avoid employee National Insurance (below £12,570) and employer National Insurance (ideally around £5,000 to avoid the employer NI charge entirely).

Dividends can be taken as and when the company has available profit after corporation tax. There's no maximum, but you'll pay dividend tax on anything above the £500 allowance at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).

For most small company directors earning £50,000-£100,000, the optimal structure is around £5,000-£9,100 salary and the remainder as dividends. Above £100,000, pension contributions become increasingly tax-efficient as an alternative to high dividend payments.

We optimize this for each client based on your profit level, personal tax position, and other income sources. The calculator on this page uses the optimal split automatically.

For 2025/26, the most tax-efficient director salary is around £5,000-£9,100 annually, paid monthly. Here's why:

£5,000 salary: This is at the employer National Insurance secondary threshold. The company pays no employer NI (15% saving), and you pay no employee NI because it's below the £12,570 threshold. However, you don't earn state pension qualifying years at this level.

£9,100 salary: This exceeds the Lower Earnings Limit for National Insurance (£6,396 for 2025/26), which means you earn state pension qualifying years even though you don't actually pay NI (you still don't pay employee NI because you're below £12,570). The company pays minimal employer NI — around £615 per year at 15% on earnings above £5,000. This is often worth it for the state pension accrual.

£12,570 salary (personal allowance): This uses your full personal tax allowance and maximizes state pension credits, but the company pays employer NI of around £1,135 per year. For most directors, the extra NI cost outweighs the benefit compared to the £9,100 level.

Our default recommendation is £9,100 for most directors who care about state pension accrual. If you're years away from state pension age or already have a full NI record from previous employment, £5,000 is optimal to minimize all NI. We'll advise based on your specific situation.

Yes, you still file a personal self-assessment tax return, but you're no longer filing as self-employed. Instead, you declare:

• Employment income (your salary from the company — we provide a P60 at year-end)

• Dividend income (we provide a summary of dividends declared during the tax year)

The self-assessment return is usually simpler than sole trader returns because you're not calculating business profit yourself — that's done in the company accounts. You're just declaring the income you received personally (salary and dividends) and paying any personal tax due on dividends above the £500 allowance.

LOYALS prepares and files your personal tax return as part of our service. We have all the information (we know your salary because we run payroll, and we know your dividends because we prepare them). You review and approve; we submit it. Most clients spend less than 30 minutes on this each year.

The mandatory costs are minimal: Companies House confirmation statement (£13/year) and potentially accountancy fees, though these exist for sole traders too.

The real ongoing cost is professional accounting and compliance support. A limited company requires:

• Monthly bookkeeping and management accounts

• Monthly payroll processing (for your director salary)

• Quarterly VAT returns (if registered)

• Annual accounts preparation and filing with Companies House

• Corporation tax return

• Personal self-assessment return

• Annual confirmation statement filing

Typical costs in London: £200-£500+ per month with traditional accountants, often with additional charges for year-end accounts (£800-£1,500) and personal tax returns (£250-£400).

LOYALS fixed fee: £150 + VAT per month, all-inclusive. No additional charges for year-end, no per-item fees for payroll or VAT, no surprise bills. Everything listed above is included, plus unlimited email and WhatsApp support.

So the realistic ongoing cost of running a limited company with LOYALS is £180/month (£150 + VAT) or £2,160/year. For most businesses earning over £50,000 profit, the tax saving alone covers this cost 2-3 times over.

Yes, you can close the limited company and return to sole trader status, though there are tax and administrative considerations.

If the company has minimal assets and no debt, you can dissolve it voluntarily through a strike-off application to Companies House (costs £10). This takes about 3 months to complete. Any remaining cash in the company when it's dissolved is distributed to shareholders and treated as a capital distribution (potentially subject to capital gains tax, though the first £3,000 is exempt).

If the company has significant retained profit or assets, you may need a formal liquidation (Members' Voluntary Liquidation) to close it tax-efficiently. This costs £1,500-£3,000+ depending on complexity, but allows you to extract remaining value as capital rather than income, which can be more tax-efficient if you qualify for Business Asset Disposal Relief.

Realistically, very few people reverse incorporation once they've done it — the tax benefits and structural advantages usually outweigh any perceived simplicity of sole trader status. But the option exists if circumstances genuinely change (e.g., you decide to wind down the business entirely or take employment).

MTD for Income Tax Self Assessment (MTD for ITSA) becomes mandatory from April 2026 for sole traders with gross income over £50,000. This is a game-changer for the incorporation decision.

Under MTD, affected sole traders must file quarterly digital updates (4 per year) plus an end-of-period statement and final declaration — 6 submissions instead of the current 1 annual self-assessment. You'll need MTD-compatible software (Xero, QuickBooks, etc.) and quarterly bookkeeping rather than annual catch-up.

For most sole traders, this effectively doubles or triples compliance costs. If you're currently paying £100-£150/month for annual accounts only, expect £200-£300/month for quarterly MTD compliance.

Limited companies are not subject to MTD for ITSA. Company directors file one corporation tax return per year (as now), and personal self-assessment remains annual. The quarterly burden doesn't apply.

Here's the math: a sole trader earning £60,000 faces (a) £2,000-£3,000 higher tax vs limited company, plus (b) £1,200-£1,800 additional MTD compliance costs = £3,200-£4,800 annual disadvantage. At this level, incorporation is financially compelling purely on the MTD impact, before considering limited liability, pension benefits, or mortgage advantages.

If you're a sole trader earning £50,000+, the window to incorporate before MTD hits is closing. April 2026 will see a rush of businesses incorporating to avoid quarterly filing. Act now and you'll avoid the bottleneck.

Dividend strategy depends on your total income level and timing across tax years. The basic principles:

Use your dividend allowance efficiently: The first £500 of dividends per year is tax-free. If you're married and your spouse is a shareholder, they also get a £500 allowance, so family companies can extract £1,000 annually tax-free through dividends.

Avoid dividend tax rate jumps: Dividend tax is 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate). If you're near a threshold — for example, total income of £48,000 puts you £2,270 away from higher rate tax — you might delay dividends until the next tax year to keep them in the basic rate band.

Match dividends to cash flow needs: Unlike salary (which must be paid regularly and creates fixed obligations), dividends can be declared flexibly when the company has profit and you need the cash. Many directors take monthly salary to cover living costs, then declare dividends quarterly or as needed for larger expenses.

Year-end planning: If you're approaching 5th April with retained profit in the company and haven't used your basic rate band, it's often worth declaring dividends before year-end to utilize that lower tax rate. We monitor this and advise you proactively.

LOYALS manages dividend strategy as part of our advisory service. We track your personal tax position throughout the year and recommend optimal dividend timing based on your income, tax band proximity, and cash needs.

Yes, limited companies are legally required to have a separate business bank account in the company name. You cannot use a personal account for company transactions.

This is different from sole traders, where a separate business account is advisable but not legally required. As a company director, you are legally distinct from the company — it's a separate legal entity. Mixing personal and company finances is illegal and can result in serious consequences including director disqualification and personal tax liability for company income.

Setting up a business bank account is straightforward. We guide you through the application process with business banking providers that work well for small companies: Tide, Starling, Mettle, and traditional banks like HSBC, Barclays, and NatWest all offer business accounts.

Most business accounts for small companies are either free (digital-only banks like Tide) or have modest monthly fees (£5-£10). We'll help you choose the right account for your needs and integrate it with Xero or QuickBooks so transactions feed automatically into your accounting.

Your sole trader CIS registration doesn't transfer to the limited company — the company needs its own CIS registration as a subcontractor, which we handle as part of incorporation.

The process: we register the company for CIS with HMRC, then apply for Gross Payment Status (GPS) on behalf of the company. GPS allows the company to receive payments gross (100% of invoice value) rather than suffering 20% CIS deductions.

To qualify for GPS, the company must meet compliance tests (up-to-date tax returns, no significant compliance failures) and turnover tests (at least £30,000 turnover from construction in the last 12 months). Most established CIS subcontractors meet these easily, and GPS is typically granted within 4-6 weeks.

Once GPS is approved, you notify your contractors of the company's new CIS registration number and UTR. They verify the GPS status through HMRC's online system and start paying the company gross. The cash flow improvement is immediate — no more waiting months for CIS refunds via self-assessment.

Your sole trader CIS registration is closed when you notify HMRC you've ceased self-employment. LOYALS handles the entire CIS transition including registration, GPS application, contractor notifications, and verification.

For most service-based businesses, there's nothing to transfer — you simply start trading under the company instead of personally. Work you complete after incorporation is invoiced by the company; there's no asset transfer and no tax charge.

For businesses with physical assets (equipment, vehicles, stock), incorporation can potentially trigger tax charges because you're transferring assets from personal ownership to the company. However, there are reliefs and strategies to minimize this:

Incorporation Relief: If you transfer the entire business (not just selected assets) to the company in exchange for shares, Incorporation Relief may apply, deferring any capital gains tax until you eventually sell the shares. This is common for businesses with valuable plant, machinery, or goodwill.

Transfer at cost: Equipment and stock can often be transferred to the company at original cost (rather than current market value), avoiding capital gains. The company then holds the assets at that cost for its own accounting purposes.

Sale at market value: If assets have significant value, you might sell them to the company at fair market value. The company pays you (or you take shares/director's loan in lieu), and any capital gain is subject to CGT at 10% or 20% depending on your total income. The company then owns the assets outright.

For most small service businesses (contractors, consultants, freelancers), incorporation is effectively tax-free because there are no substantial assets to transfer. For businesses with equipment, stock, or property, we'll advise on the optimal transfer structure to minimize tax charges.