As a sole trader, you are the business; there is no legal distinction between you and your business. You are personally responsible for any debts, meaning that your personal assets are at risk if the business fails.

A limited company is a separate legal entity from its owner(s). This offers limited liability protection, meaning that in the event of financial trouble, your personal assets are safeguarded, and you are only liable for the amount you invest in the company. The company itself is responsible for its own debts and obligations.

This also means that you cannot use the company as your personal bank account as it’s legally separate and so withdrawing money has tax consequences.

One of the most important differences between being self-employed and running a limited company is how you are taxed.


As a sole trader, you pay income tax and national insurance through Self Assessment on your business profits. You are also required to pay Class 4 National Insurance Contributions (NICs). The tax rates are currently 0% for your personal allowance, 20% in the basic rate band, 40% in the higher rate band and 45% in the additional rate band. National insurance is 0% on the initial profits, 6% on the next section and 2% on the higher amount.


A limited company is subject to corporation tax on its profits. The current rate for corporation tax in the UK is 25% for profits over £250,000, and a marginal rate for profits between £50,000 and £250,000. For profits below £50,000, the rate is 19%. These thresholds may be reduced if you have shares in other companies.


You’ll be a director and shareholder of your limited company and can take income through a combination of salary and dividends. The salary is taxed on you at the income tax rates above and employee/employer national insurance will also be due, but there is corporation tax relief in the company. Dividends are taxed at lower tax rates but are taken from the net profits of the company so there is no tax relief.

The fact that you can choose how/when to extract profits from your limited company is often the main reason people opt for running their business via a limited company.

Sole traders can deduct allowable business expenses from their profits before calculating tax. These expenses must be "wholly and exclusively" for business purposes. See our previous blog post here for some examples.

Limited companies can also deduct business expenses from their profits before calculating tax. The company can contribute to the director’s pension without triggering a personal tax liability (subject to the annual allowance) and also provide some small gifts and annual parties for employees (including the director). See our previous blog post here about trivial benefits.

If any personal costs are covered by the company then there will be national insurance due for the company and personal tax due for the director so this should be discussed with your accountant.

Whether you're self-employed or a limited company, you will still need to adhere to the same VAT rules and register for VAT if you meet the threshold.

You can hire employees whether you're self-employed or a limited company. You'll need to set up a payroll scheme and follow the payroll processing procedures, as well as adhering to employment laws.

The administrative burden for sole traders is relatively light. Sole traders must:

• Register with HMRC for Self Assessment.
• Submit an annual Self Assessment tax return.
• Maintain basic accounting records to show income and expenses.

Running a limited company comes with more administrative responsibilities, including:

• Registering the company with Companies House.
• Filing annual accounts and a confirmation statement with Companies House.
• Submitting a Corporation Tax return to HMRC.
• Maintaining more detailed accounting records, as your accounts must follow certain legal requirements.

It is advisable to have an accountant whether you are self-employed or running a limited company but particularly with a limited company as you must adhere to company legislation and your accounts must be prepared under certain standards.

For some businesses, operating as a limited company can enhance credibility and trust with potential customers and suppliers. The "Limited" after a company name suggests that the business is more established and professionally managed. In certain industries, clients may prefer to work with a limited company due to the protection and formality it offers.

Sole traders may find that certain larger companies or suppliers are reluctant to enter into contracts with them due to the lack of limited liability.

Operating as a sole trader is simple and flexible, which can be advantageous for small businesses or freelancers with modest earnings. However, as your business grows, the lack of limited liability and tax advantages may become restrictive.

If you plan to grow your business, hire employees, or seek external investment, a limited company is often the better structure. It provides scalability, greater flexibility in terms of ownership, and can make it easier to raise capital. However, it also brings greater complexity.

Choosing between self-employment and setting up a limited company depends on a number of factors, including your business size, growth aspirations, and personal circumstances. Generally:

• Self-Employed status is simpler, requires less admin, and is often suitable for small, low-risk businesses or freelancers.
• Limited Company status offers more tax planning opportunities, reduced personal financial risk, and is ideal for businesses aiming to grow and scale.

You can always begin running your business as a sole trader and move to a limited company later on as you grow.

Before making a decision, it's advisable to consult with an accountant to assess your individual situation and ensure you're making the most tax-efficient choice for your business. CJL Accountancy can help with looking at your personal circumstances so that you can make an informed decision.