From April 2026, HMRC’s Making Tax Digital rules will begin changing how sole traders and landlords report income tax. For many businesses, this is not just another compliance update. It changes the rhythm of financial management itself.
Sole Trader vs Limited Company: A 2025/26 UK Guide
March 26, 2026
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Choosing between sole trader and limited company status sets the tax you pay, the paperwork you file, and the personal risk you carry. The right answer depends on your profits, your sector, and your appetite for admin. For the 2025/26 tax year, three changes have shifted the maths: Employer’s National Insurance rose to 15% with a £5,000 threshold from April 2025, the dividend allowance sits at just £500, and Making Tax Digital for Income Tax begins for sole traders and landlords above £50,000 from April 2026.
This guide explains how each structure works, where the tax crossover usually sits, and how the decision plays out for locum doctors, landlords, freelancers and trades. All figures are current for the UK 2025/26 tax year.
The short answer
If your business profits sit below roughly £30,000 and you value simplicity, sole trader status often wins. Once profits move past the higher-rate threshold of £50,270, a limited company usually starts to save tax, especially if you can leave profits inside the company. Beyond that point, other factors weigh just as heavily: liability protection, client expectations, pension planning, and whether a spouse with an unused basic-rate band can become a shareholder.
Tax is rarely the only reason to incorporate. It is just the most visible one.
How each structure actually works
Sole trader
You and the business are the same legal person. You register with HMRC for Self Assessment, keep records of income and expenses, and file one tax return each January. Profits are taxed as personal income, with Class 4 National Insurance on top.
There is no Companies House filing, no statutory accounts, and no separate corporation tax return. The trade-off is unlimited personal liability. If the business owes money it cannot pay, creditors can pursue your personal assets, including your home in some circumstances.
Limited company
The company is a separate legal entity. You set it up at Companies House, become a director and usually a shareholder, and the company owns the business. Corporation Tax is paid on company profits. You then take money out as salary, dividends, pension contributions or director’s loan repayments, each with its own tax treatment.
Filings are more involved: annual accounts at Companies House, a CT600 corporation tax return at HMRC, a confirmation statement, and PAYE if you run a salary. Personal liability is limited to unpaid share capital, subject to important exceptions covered further down.
How each structure actually works
| Feature | Sole Trader | Limited Company |
| Legal status | You and the business are the same | Separate legal entity |
| Personal liability | Unlimited | Limited (with exceptions) |
| Set-up | Register with HMRC | Register with Companies House and HMRC |
| Tax on profits | Income Tax (20%/40%/45%) plus Class 4 NI (6%/2%) | Corporation Tax (19% / 25% / marginal relief) |
| Profit extraction | Drawings, no separate tax | Salary, dividends, pension, director’s loan |
| Public disclosure | Minimal | Directors, accounts and PSCs on public register |
| Accountancy cost | Lower | Higher (more filings) |
| MTD for Income Tax | Yes, phased from April 2026 | No (company files separately) |
| Credibility with larger clients | Variable | Generally higher |
| Pension flexibility | Personal contributions only | Employer contributions from the company |
| Best suited to | Lower profits, simple businesses, side incomes | Higher profits, growth plans, riskier work |
The tax difference in 2025/26
Sole trader tax
A sole trader pays Income Tax on profits above the £12,570 Personal Allowance: 20% to £50,270, 40% to £125,140, and 45% above. Class 4 NI adds 6% between £12,570 and £50,270 and 2% on profits above £50,270. Mandatory Class 2 NI has been abolished, though voluntary contributions at £3.50 a week remain available for those with low profits who want to protect their State Pension record.
There is no separate company tax. Every pound of profit is taxed in the year it is earned, whether you draw it or not. If your adjusted net income passes £100,000, the Personal Allowance tapers away, creating an effective 60% marginal rate between £100,000 and £125,140.
Limited company tax
A company pays Corporation Tax at 19% on profits up to £50,000, 25% on profits above £250,000, and an effective marginal rate of around 26.5% in between. Those thresholds are divided where you control more than one associated company.
You then decide how to extract money. The standard tax-efficient pattern is a small salary up to the Personal Allowance (or the £5,000 Employer NI secondary threshold for single-director companies), with the rest as dividends. The Dividend Allowance is £500. Above that, dividends are taxed at 8.75% in the basic rate band, 33.75% in the higher rate band, and 39.35% in the additional rate band.
Employer’s NI is now 15% on salary above £5,000, which has reduced (though not removed) the value of a typical director’s salary. Companies with at least one non-director employee can also claim the £10,500 Employment Allowance.
Where the crossover sits
For a single owner with no spouse to share income with, the tax saving from incorporation tends to appear around the higher-rate threshold. Below £30,000 profit, the difference is usually small and often wiped out by extra accountancy and Companies House admin. Between £30,000 and £50,000, the structures run close. Above £50,000, with surplus profit retained inside the company, a limited company starts to pull ahead.
The picture changes if you need every pound of profit for living costs (extracting it all narrows the gap), if you can split shares with a non-working or basic-rate spouse (which widens it), or if you can make sizeable employer pension contributions from the company.
Liability, credibility and admin
Limited liability is the headline reason many owners incorporate. The protection is real, but it is not absolute. Directors remain personally liable for:
- Debts they have personally guaranteed, such as most bank loans and many commercial leases
- Wrongful or fraudulent trading where the company is insolvent
- Unlawful dividends paid when there are no distributable profits
- Breaches of the seven director duties in the Companies Act 2006
- Certain tax debts where HMRC issues a personal liability notice
The corporate veil protects honest owners of a properly run company. It does not protect anyone who treats the company bank account as personal property.
On credibility, larger contractors, public sector buyers and some lenders prefer to deal with limited companies. Agencies often refuse to engage sole traders because of employment status risk. Trades and consumer-facing businesses see less of this pressure.
Administration is where sole trader status earns its place. One tax return, no published accounts, no statutory filings, and no public record of your home address (provided you do not use it as a business address). For many small businesses, that simplicity is worth real money.
What this means for specific UK professions
Locum doctors
One rule sits above everything else: limited company income cannot be pensioned in the NHS Pension Scheme. The BMA, NHSBSA and Primary Care Support England all confirm this. A locum who runs NHS work through a personal company loses NHS pension accrual for those engagements, which is rarely a sensible trade.
Most NHS locum work is also assessed as inside IR35 by the engaging trust, so the off-payroll rules apply and the tax advantages of a personal service company largely disappear. The exception is genuine private practice, which is usually outside IR35 and can sit in a limited company. Many doctors run a dual structure: NHS work paid through PAYE or as a self-employed practitioner to preserve pension rights, and private work through a company.
GP partners are taxed as members of a partnership and are practitioners in the NHS Pension Scheme. They have no reason to incorporate the partnership itself, though some hold private earnings separately.
Landlords
Section 24 removed full mortgage interest relief for individual landlords from April 2020. Interest now only attracts a basic-rate (20%) tax credit, while the gross rent is fully taxable. A higher-rate landlord with material borrowing pays noticeably more tax than they did pre-2017 and can be pushed into higher tax brackets or lose the Personal Allowance.
Companies still deduct mortgage interest in full as a business expense. That is the main reason buy-to-let purchases through Special Purpose Vehicle (SPV) limited companies, typically using SIC code 68209, now dominate new applications. Lender choice is narrower and rates run slightly higher, but the after-tax economics often favour the SPV for a higher-rate landlord building a portfolio.
Incorporating an existing portfolio is more complex. Transferring property from personal ownership to a company is a disposal at market value, which can trigger Capital Gains Tax and SDLT, including the 5% additional dwellings surcharge that has applied since 31 October 2024. Section 162 incorporation relief can defer the CGT for portfolios genuinely run as a business (the Ramsay case is the standard reference). From April 2026, that relief becomes claim-based rather than automatic. None of this is a DIY exercise.
For a single-property landlord or a basic-rate couple, a Form 17 declaration to split income unequally may achieve more than incorporation, with none of the friction.
Freelancers and contractors
IR35 is the swing factor. If engagements are outside IR35, a limited company still offers Corporation Tax efficiency and dividend extraction. If most work is inside IR35, the fee-payer deducts tax and NI at source and the company benefit shrinks to administrative inconvenience. The 5% deemed expenses allowance is not available under the off-payroll rules.
Sole trader status sounds simpler, and it is, but many UK agencies refuse to engage sole traders because the agency carries the PAYE liability if HMRC later reclassifies the worker as an employee. Most freelancers end up choosing between a personal service company and an umbrella, with sole trader as a third option mainly for direct client work.
A limited company still earns its keep for freelancers with mixed inside and outside engagements, multiple concurrent clients, overseas clients, or plans to retain profits for investment.
Tradespeople and small business owners
For a sole trader plumber, electrician or decorator with profits below around £40,000, the tax saving from a company is often small and the admin is real. Above that level, a company can shelter retained profits at 19%, support pension planning, and provide a cleaner separation if a job goes wrong.
CIS subcontractors get a real cash-flow benefit from incorporating: company CIS deductions can be offset against PAYE and NI liabilities each month, rather than waiting for a Self Assessment refund. Trades carrying meaningful third-party risk often value limited liability for reasons that have nothing to do with tax, though good public liability insurance matters more than the legal structure.
Making Tax Digital changes the calculation
From April 2026, sole traders and landlords with combined gross income above £50,000 must keep digital records and submit quarterly updates to HMRC under Making Tax Digital for Income Tax Self Assessment. The threshold falls to £30,000 in April 2027 and £20,000 in April 2028. Limited companies are not in scope; a separate MTD for Corporation Tax timetable is still being consulted on.
For an unincorporated business already on cloud bookkeeping, the change is manageable. For a sole trader still using spreadsheets, the cost and time of compliance narrow the gap with limited company status. It is worth factoring into any structure review during 2026.
When to switch from sole trader to limited company
A reasonable trigger list:
- Profits consistently above £40,000 to £50,000 with surplus you can leave in the company
- Clients or agencies that require a limited company supplier
- Personal liability risk that insurance alone cannot cover
- Plans to bring in a co-owner, raise investment, or sell the business
- A spouse or civil partner with unused basic-rate band
- Heavy mortgage interest on a growing rental portfolio
Section 162 incorporation relief can defer Capital Gains Tax on goodwill and assets transferred into a new company, but it is not automatic from April 2026 and the rules around goodwill have been restrictive since 2015. Stock, equipment and any property need their own treatment.
Going the other way is also possible. For a solvent close-down with retained profits above £25,000, a Members’ Voluntary Liquidation can give capital tax treatment and access to Business Asset Disposal Relief, charged at 14% for 2025/26 and rising to 18% from April 2026.
How Aksons can help
Aksons work with UK limited companies, sole traders, freelancers, locum doctors and landlords every day. Our service is one monthly fee covering accounts, taxation, bookkeeping, VAT and Self Assessment, with no hidden charges and a named accountant who knows your business.
If you are weighing sole trader against limited company, we will run the numbers on your actual profits and circumstances, factor in pension, IR35, MTD and any property holdings, and give you a clear answer. If incorporation is right, we handle the registration, the asset transfer and the first set of company filings. If sole trader still suits you, we will say so.
Frequently Asked Questions
Feeling unsure? These might help!
Do I pay less tax as a sole trader or a limited company?
It depends on profit. Up to about £30,000 the tax difference is small. Above the higher-rate threshold of £50,270, a limited company is usually more efficient, particularly if you can retain profits in the company or split shares with a basic-rate spouse.
At what profit level should I switch from sole trader to limited company?
For most owners, the crossover sits between £40,000 and £50,000 of taxable profit. Below that, the extra accountancy and Companies House admin often outweigh the tax saving. Above it, the company structure tends to win on tax and liability.
Can I be a sole trader and run a limited company at the same time?
Yes. Many people do, for example trading personally for one type of work and through a company for another. Each entity files separately and the income streams are taxed under their own rules.
Do sole traders need to register with Companies House?
No. Sole traders register only with HMRC for Self Assessment. Companies House handles limited companies and LLPs.
What is limited liability and what does it not protect against?
Limited liability caps a shareholder’s loss at any unpaid share capital. It does not protect directors from personal guarantees, wrongful or fraudulent trading, unlawful dividends, breach of director duties, or certain HMRC personal liability notices.
Can a locum doctor use a limited company for NHS work?
NHS Pension contributions are not allowed on income paid to a limited company. Most NHS locum engagements are also inside IR35. A company can still be useful for genuine private practice, often alongside PAYE or self-employed NHS work to preserve pension rights.
Does a landlord pay less tax through a limited company?
For a higher-rate landlord with significant mortgage interest, a limited company often pays less tax because the company deducts interest in full and pays Corporation Tax on profit. Transferring an existing portfolio in carries CGT, SDLT and refinancing costs, so advice is essential before incorporating.
How do I change from sole trader to limited company?
You incorporate a new company at Companies House, transfer the trade and assets to it, register the company for the relevant taxes, and close down the sole trader filings with HMRC. Section 162 incorporation relief can defer Capital Gains Tax on qualifying transfers, but rules tighten from April 2026.
Does Making Tax Digital affect both structures?
Not yet. MTD for Income Tax Self Assessment applies to sole traders and landlords from April 2026 (over £50,000), April 2027 (over £30,000) and April 2028 (over £20,000). Limited companies have a separate timetable still under consultation.
Is a limited company harder to close than a sole trader business?
Yes. A sole trader can simply notify HMRC and stop trading. A company is closed by strike-off (DS01) or Members’ Voluntary Liquidation, with the latter giving capital tax treatment for distributions above £25,000.
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Choosing between sole trader and limited company status sets the tax you pay, the paperwork you file, and the personal risk you carry. The right answer depends on your profits, your sector, and your appetite for admin.