Business Tax

Sole Trader vs Limited Company: How the Tax Differs

7 min read · Reviewed 11 Sep 2026

Sole traders and limited companies are taxed in different ways: different taxes apply to profit, National Insurance works differently, and each has its own filing obligations. This guide compares the two side by side, without recommending which one to choose.

Two different legal structures

A sole trader runs their business as an individual: there is no legal separation between the person and the business, and business profit is simply added to their personal income.

A limited company is a separate legal entity from the person running it. The company owns the business, earns the profit, and pays its own tax on that profit. A director who also owns shares can then take money out of the company as salary, dividends, or both.

This guide compares how each structure is taxed. It does not recommend one structure over the other: the right choice depends on individual circumstances, and is outside the scope of this guide.

How profit is taxed

A sole trader's business profit is treated as personal income and taxed through Income Tax, using the same Personal Allowance and tax bands that apply to any other income.

A limited company's profit is taxed separately, through Corporation Tax, before anything is paid out to the director. Corporation Tax has its own rates: a small profits rate applies up to a lower profit threshold, a main rate applies above a higher threshold, and marginal relief tapers the rate between the two.

How profit is taxed, by structure
	Sole trader	Limited company
Tax on profit	Income Tax (personal bands)	Corporation Tax (company rates)
Who owns the profit	The individual, directly	The company, as a separate legal entity
Tax-free allowance	Personal Allowance	None; the small profits rate applies from £1 of profit

Taking money out of a limited company for personal use is a separate step from the company paying Corporation Tax, and is usually done as salary, dividends, or a mix of the two, each with its own tax treatment.

National Insurance differences

A sole trader pays Class 4 National Insurance on their profit above a set threshold, and may also pay Class 2 National Insurance (or get National Insurance credits without paying it, depending on profit level) to build entitlement to the State Pension and certain benefits.

A limited company does not pay Class 2 or Class 4 National Insurance on its profit. A director taking a salary pays employee National Insurance on that salary in the normal way, and the company pays employer National Insurance on it. Dividends are not subject to National Insurance at all, for either the company or the director.

National Insurance treatment is one of the clearest differences between the two structures: it applies to a sole trader's whole profit above the threshold, but only to whatever part of a company's money is paid out as salary.

Filing obligations

A sole trader registers for Self Assessment, reports business income and expenses on a Self Assessment tax return each year, and pays Income Tax and National Insurance through that return, usually by 31 January following the end of the tax year.

Sole trader: register for Self Assessment, file one Self Assessment return a year, keep business records to support it.
Limited company: register the company with Companies House, file a Company Tax Return and pay Corporation Tax, file annual accounts and a confirmation statement with Companies House, and the director separately files a personal Self Assessment return covering any salary and dividends drawn from the company.

A limited company therefore carries more separate filing obligations than a sole trader: company-level filings with HMRC and Companies House, plus the director's own personal return.

Official sources

GOV.UK sources used in this guide

Key takeaways

A sole trader's profit is taxed through personal Income Tax; a limited company's profit is taxed separately through Corporation Tax.
Sole traders pay Class 2 and Class 4 National Insurance on profit; limited companies pay none, though a director's salary carries employee and employer National Insurance.
Dividends are not subject to National Insurance for either the company or the director.
A sole trader files one Self Assessment return a year; a limited company has separate company-level filings plus the director's own personal return.
This is a factual comparison only, not a recommendation on which structure to use.

Frequently asked questions

Which structure pays less tax overall?

It depends on profit level, how money is drawn from a company, and individual circumstances. This guide compares how each structure is taxed rather than recommending one.

Can a sole trader become a limited company later?

Yes, this is commonly called incorporating. It involves setting up a company and transferring the business to it, with its own tax and administrative steps.

Do limited company directors pay Income Tax too?

Yes. Any salary or dividends a director draws from the company are taxed on the director personally, separately from the Corporation Tax the company itself pays on its profit.

Last reviewed

Reviewed 11 September 2026
Version 1.0.0

This guide explains, as a factual comparison, how sole traders and limited companies are taxed differently. It is not personal tax advice and does not recommend one structure over the other. Rules and thresholds change between tax years; check current figures for your situation.