Starting a business in the UK comes with an important decision: should you operate as self-employed (sole trader) or form a limited company?
Each structure has pros and cons depending on your income, risk, and growth goals. Here’s a quick guide to help you decide.
1. Self-Employed: Simpler and More Flexible
As a sole trader, you’re self-employed and personally responsible for your business’s debts. This structure is:
- ✅ Easy to set up and run
- ✅ Lower admin costs and fewer filings
- ✅ Ideal for freelancers, part-time gigs, or side businesses
Tax: You pay income tax and National Insurance on your profits. It’s simple, but you may pay more tax as your income grows.
Risk: You’re personally liable—your assets (like your home) are at risk if the business goes into debt.
2. Limited Company: Professional and Tax-Efficient
A limited company is a separate legal entity, offering:
- ✅ Limited liability – your personal assets are protected
- ✅ Potential tax savings, especially above £50,000 in profit
- ✅ More credibility with clients and investors
Tax: Corporation Tax on profits, with dividends taxed separately. You can pay yourself via a mix of salary and dividends for tax efficiency.
Admin: More paperwork—annual accounts, confirmation statements, and director duties.
Which Should You Choose?
| Criteria | Sole Trader | Limited Company |
|---|---|---|
| Simplicity | ✅ Yes | ❌ More admin |
| Personal Liability | ❌ High | ✅ Limited |
| Tax Efficiency | ❌ Lower (at high income) | ✅ Better if earning more |
| Perception | Basic | ✅ More professional |
Verdict:
- Start as self-employed if you’re testing the waters or earning modestly.
- Go limited if you’re growing fast, want tax efficiency, or need legal protection.
At DMC Accounting Ltd, we’re here to support you every step of the way. If you have questions, get in touch today.