One of the first practical decisions when going freelance is whether to operate as a sole trader or set up a limited company. Both are legitimate options; the right one depends on your income level, risk tolerance, and the type of clients you work with. Here’s how to think through it — though for anything tax-specific, it’s worth getting advice from an accountant.
Sole trader: simpler, less tax-efficient at higher incomes
As a sole trader, you register with HMRC, file a self-assessment return each year, and pay income tax and National Insurance on your profits. There’s minimal admin overhead and no requirement for a separate business bank account (though it’s good practice). The downside is that above a certain income level — roughly £30,000–50,000 profit — you’ll typically pay more tax than you would through a limited company.
Limited company: more admin, more tax flexibility
A limited company is a separate legal entity. You pay Corporation Tax on profits (currently 19–25% depending on profit level) and draw income as a combination of salary and dividends — a structure that can be more tax-efficient above a certain income threshold. The trade-off is more admin: annual accounts, Companies House filings, a business bank account, and more complex bookkeeping.
IR35 and client requirements
Some clients — particularly larger organisations and public sector bodies — require contractors to operate through a limited company. IR35 rules (which determine whether you’re effectively an employee for tax purposes) are also a factor if you work with larger clients. This is an area where an accountant’s advice is genuinely worth the cost.
A practical starting point
If you’re just starting out or expect to earn under £30,000 in your first year, sole trader is usually the right starting point — simpler, lower cost, and easier to understand. As your income grows, review the decision with an accountant who works with freelancers.
The business structure decision guide below walks through the key factors in the sole trader vs limited company decision, with a simple framework for making the choice.