Factors such as how much you earn, and the industry you operate in are all at play when considering what type of structure is cheaper and whether you should be a sole trader or a limited company.
For some business owners, staying a sole trader is the simpler, cheaper option. For others, especially as profits grow, switching to a limited company can save real money because of the extra options for tax efficiency – becoming the natural next step.
Below, we’ll break down the costs of each structure and where the numbers tend to tip in one direction or the other, so you can see where you’d likely land.
What’s the difference between a sole trader and a limited company?
In legal terms a sole trader is the business, whilst if you run a limited company, you’re separate because the company is a different legal entity to you as the human person who owns it. This affects how you operate, your liability if things go wrong, and the taxes you pay.
For example, because a sole trader is the business itself, with no legal distinction, they pay Income Tax and National Insurance on their profits (even if they don’t actually take them out of the business for themselves).
A limited company, on the other hand, must submit a Company Tax Return each year, and pay Corporation Tax on its profits. You, as the owner, will only pay Income Tax and NI on the money you take from the business for yourself, but any profits left over still belong to the company, so you can’t just take them out freely like you could if you were a sole trader.
Instead, profits need to be taken out through the likes of dividends or by taking a salary – lots of limited company directors will pay themselves a mix of the two for tax-efficient purposes.
The cost of being a sole trader
Being a sole trader is common for freelancers and side-hustlers – usually because the tax reporting requirements are simpler and due to how cost-effective it is. Below are the costs you’d typical be expected to pay when operating as a sole trader.
Registration and legal fees
You can register to become a sole trader for free through the gov.uk website.
Income Tax and National Insurance
As a sole trader, you’ll pay Income Tax and National Insurance (Class 2 and 4) on your profit – that’s your turnover minus whatever you’ve legitimately spent running the business. Not on everything you bring in, just what’s left over.
Business insurance
Here’s the bit people don’t always think about – as a sole trader, there’s no legal separation between you and your business. If something goes wrong, your personal stuff, like your house, your car, your savings, could be on the line.
That’s why Public Liability or Professional Indemnity Insurance is worth budgeting for. It’s an extra cost, but it’s the kind of cost that earns its keep.
VAT
Once your turnover passes £90,000 a year, you have to register for VAT. That means more paperwork and more to stay on top of, so it’s worth knowing where that threshold sits even if you’re nowhere near it yet.
Accountancy fees
Setting up as a sole trader doesn’t cost a penny – but most people bring in an accountant to handle bookkeeping and their Self Assessment at year-end. Expect to pay somewhere between £150 and £600+ a year, depending on how complicated your finances are.
Equipment and tech
This one varies massively. For example, you could be a freelance writer who only needs a laptop and mobile phone, or you might be a tradesperson and need things like tools, protective gear, and even a van.
Marketing
A website, hosting, some advertising, a bit of branding – none of it’s optional if you want a steady stream of clients coming in. You may even hire someone to do this for you – which is ideal if you’re busy and unsure on how to get your business out there!
Expenses you can claim as a sole trader
We’ve mentioned things like equipment and tech – as well as marketing costs. All of which pile up – but the good news is anything you spend ‘wholly and exclusively’ for your business can be typically claimed back as an allowable business expense.
This basically means the cost of it is deducted off your profit – reducing the income tax you owe to HMRC. This covers things like rent on a business premises, utility bills, business insurance, the business share of your phone and internet, and accountancy or legal fees.
Learn more about claiming business expenses as a self-employed sole trader.
The cost of setting up and running a limited company
Whilst being a sole trader is cheaper in terms of set-up costs, running a limited company could save you more money in tax depending on how much you earn. We’ll go over what you might typically expect to pay when running one.
Registration fees
How much you pay to set up your limited company depends on how you do it. You have a few options:
- Doing it yourself: Registering your company directly through GOV.UK costs £100. It’s the cheapest route if you don’t mind handling the paperwork yourself (although you might incur other legal expenses if you need a solicitor or advisor to look over any of this)
- Using a formation agent: Plenty of people go through an intermediary instead, which usually costs anywhere from £15 to £150+. These packages often come with handy extras thrown in – such as digital documents, or even a free or discounted business bank account
- Have your accountant register your company for you: Some accountants will manage the incorporation process on your behalf, including taking care of the associated paperwork such as forms for shareholders or the company’s articles of association. Some accountants will charge extra for this – we provide this as a free service for our clients!
Corporation Tax
Unlike sole traders, limited companies don’t pay Income Tax on their profits – they pay Corporation Tax instead.
For 2026/27, that’s 19% on profits up to £50,000, rising to 25% on profits over £250,000, with marginal relief tapering the rate for anything in between.
It’s worth getting your head around early, since this is the rate that does most of the heavy lifting when people talk about limited companies being ‘tax efficient’ because the rates are lower than Income Tax.
VAT
The rules here work the same as for sole traders – once your company’s turnover passes £90,000 in a 12-month period, you’re required to register for VAT. From that point, you’ll need to charge VAT on your sales, file VAT returns (usually quarterly), and keep digital records under Making Tax Digital.
Confirmation statements and annual accounts
These are running costs limited companies cannot skip.
- Confirmation statement: Companies House needs an annual check-in to confirm your company’s details haven’t changed. It’s £50 if you file online, or £110 if you’d rather do it on paper
- Annual accounts: You’re required to file annual accounts with Companies House and a Company Tax Return with HMRC. Doing it yourself is free, but most directors hand this over to software or an accountant – it’s one of those jobs where getting it wrong costs more than paying someone to get it right
Additional costs
These are the type of costs that are up to you – but well worth considering.
- Accountant fees: Most directors outsource their bookkeeping, director’s payroll, and tax returns rather than juggle it all themselves. A monthly retainer with a contractor or small business accountant can vary, so shop around for the services you want to include! Our limited company fees start at £39.50 per month.
- Registered director’s address: If you’d rather not have your home address sitting on the public register, a virtual office provider can sort that for around £15 to £30 a year. You’ll need to make sure you can actually receive and access post at this address! Some accountants will provide this service for free or an additional charge.
- Business insurance: Professional indemnity or public liability cover varies a lot by industry, but you’re typically looking at upwards of £100 to £200 a year
- Business banking: Good news here – most digital business bank accounts (think ANNA, Tide, Barclays) are either free to open or come with low monthly fees
Expenses you can claim as a limited company
The principle is still the same as a sole trader where anything you claim needs to be ‘wholly and exclusively’ for business purposes – but claiming expenses as a limited company is a little different in some cases (and stricter) – for example for working from home or for mileage.
Find out the expenses you can claim as a limited company here
What’s cheaper: A sole trader or a limited company?
Starting out, sole trader wins hands down – it’s quicker, simpler, and costs next to nothing to get going. But if your profits start creeping up or if you have multiple sources of income then a limited company can start to pull ahead.
It mostly comes down to tax, which we’ve covered above – but it’s also about how much admin you’re willing to take on and, as the director, you’ve then got more room to be clever about how you take money out: a small salary plus dividends usually works out better than taking a salary alone, since dividends are taxed at a lower rate than income, and the salary itself reduces the company’s tax bill too.
The catch? All that flexibility comes with more admin. Limited companies mean stricter filing deadlines, more paperwork, and higher accountancy fees. So, if your income’s a bit up-and-down or hard to predict, staying a sole trader might still be the cheaper option once you factor all that in.
And if your business carries real risk – a trade where things can go wrong in a way which might impact your ability to pay bills – the liability protection alone might tip the decision in favour of a limited company, even if the business doesn’t earn as much.
Honestly, the best move is to get an accountant to run your actual numbers. They’ll be able to tell you the point where switching starts to pay off for you.
Need help deciding which business structure is right for you? We can help! Learn more about our online accountancy services. Talk to one of the team on 020 3355 4047, and get an instant online quote.
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