What the two actually are
As a sole trader, you and the business are one and the same. The profit is your income, you pay tax on all of it through self assessment, and any debt the business runs up is your debt.
A limited company is a separate legal person. It owns its money, files its own accounts and pays its own corporation tax, and you draw money out as a mix of salary and dividends. That separation is the whole point, and it is also where the extra admin comes from.
Where the maths changes
The saving comes from taking part of your income as dividends rather than all of it as trading profit. That gap only becomes worthwhile once profit is comfortably past £50,000, because a company costs more to run.
“If the tax saving is under £1,000 a year, the extra admin will cost you more in attention than it saves you in money.”
The admin you take on
This is the part people underestimate. A sole trader files one return a year. A company director signs up for a good deal more.
- Annual accounts filed at Companies House
- A corporation tax return, separate from your personal one
- A confirmation statement every year
- Payroll if you take a salary, which most directors do
- Your own self assessment on top, covering dividends
Your name, a service address and a rough idea of your shareholding also go on the public register. For most people that is fine. For some it settles the question.
Risk and who you work with
Limited liability is real, and it matters if you sign contracts with serious exposure, hold client money or take on staff. If you are a freelancer invoicing three friendly clients for design work, it matters less than the tax question.
Some larger clients and agencies will only work with a limited company. Ask them before you decide.
How to decide, and when
Look at it once a year, not once a month. The natural moment is just after your year end, when you have twelve real months of profit to look at rather than a forecast.
Incorporating is quick and cheap. Winding up a company you did not need is neither, so the honest advice is to wait until the numbers clearly say yes rather than incorporating in case they might.
