Freelancer, Sole Trader or your own Limited company?

The age-old question of “how should I work as an independent professional?” has been around forever.

Not everybody knows where to start – particularly when deciding whether being a sole trader or operating through a limited company would suit them better.

In this guide we will be highlighting the differences between each status and, importantly, the factors that could make one route more suitable than another.

What is the difference between…

Self-Employed

This is a more generic term. Self-employed is a term that relates to the way that you work, rather than your business structure.

You are in control of the work that you choose to do and are not employed by somebody else in the normal sense. You also won’t usually receive employment benefits such as statutory holiday pay or sick pay.

As a self-employed person you can choose the business structure that will work best for you, be that sole trader, business partnership or limited company.

Sole Trader

Being a sole trader means you are the sole owner of a business and you and your business are considered as one combined financial and legal entity.

Because this is the simplest way of working it is also one of the most popular.

A business partnership has some similarities, although the business is run by two or more people and has separate tax and administrative requirements.

Limited Company Contractor

If you have a limited company it has its own legal identity, separate to you, the owner and any directors.

This means that the company’s finances and liabilities are generally separate from your personal ones, although there are circumstances where directors can still become personally liable.

Every limited company must be registered with Companies House. Turning your business into a limited company is also known as incorporation.

What are the advantages of being…

A Sole Trader:

• It is very simple to set up as a sole trader with comparatively little paperwork.
• Having less paperwork usually means that your accounting is a little simpler and there is less bookkeeping to be done. You will need to keep records of your business income and expenses and report the relevant figures to HMRC.
• You have more privacy as your business information and earnings are still private to you, as you don’t need to register with Companies House.

A Limited Company:

• Because your company is legally considered a separate entity, you have limited liability. This generally means that company debts and liabilities belong to the company rather than you personally, although there are exceptions.
• The company name you register with Companies House cannot normally be registered by another company under the same name. However, registering a company name does not automatically give you trade mark protection.
• A limited company can offer greater flexibility when it comes to how profits are retained and how the owner is paid. Whether it is more tax efficient than working as a sole trader will depend on your profits, salary, dividends and personal circumstances. Our Contractor Take Home Pay Calculator can break down how much you would take home based on a few expenses to help provide a clearer idea.
• Limited companies can claim a wide range of allowances and tax-deductible costs against their profits. Our full Guide to Limited Company Expenses can be found here.
• You may be able to command a higher rate of pay. Some businesses prefer to deal with other limited companies, particularly where they regularly engage contractors and consultants.
• Operating through a limited company can provide greater tax-planning flexibility because you can decide, within the relevant tax rules, when profits are retained in the company and how money is withdrawn.
• You can pay yourself through a combination of salary and dividends. Many owner-directors use this approach, although the most tax-efficient combination will depend on the company’s profits and your personal circumstances. Dividends are not subject to National Insurance, but they can only be paid from available company profits and may be subject to Dividend Tax. Read more in our guide to salary and dividends.
• A limited company structure can also make it easier to bring in investors because shares can be issued or transferred, although access to finance will depend on the strength of the business and the circumstances involved.

It is worth remembering that Corporation Tax is no longer a single 19% rate for all companies.

For the 2026 financial year, companies with profits of £50,000 or less generally pay Corporation Tax at the small profits rate of 19%. Companies with profits above £250,000 generally pay the main 25% rate, while Marginal Relief can apply between those levels. These thresholds can also be reduced where there are associated companies.

Dividend Tax also needs to be included when comparing the two structures. For the 2026/27 tax year, the Dividend Allowance is £500 and dividend income above that allowance is taxed at 10.75%, 35.75% or 39.35%, depending on your Income Tax band.

What are the disadvantages of being…

A Sole Trader:

• Probably the main disadvantage is that you have unlimited liability i.e. because you and your business are legally considered one and the same, if your business gets into debt, you, as the business owner, are personally liable and personal assets could potentially be at risk.
• It can sometimes be more difficult to raise investment because there are no shares in the business to sell to outside investors.
• As profits increase, the tax comparison between remaining a sole trader and operating through a limited company can change. There is no single income level at which incorporation automatically becomes the better option, so it is worth running the figures.

A Limited Company:

• It can be more costly and time-consuming due to the larger amount of paperwork involved and accountancy fees are likely to be a little more expensive due to the increased volume of work. There is also a fee to register your company.
• You will have more responsibilities as a company director – these outline the legal duties that you must follow when running the company.
• You will have less privacy as, once you’re registered with Companies House, certain information about your business can be viewed by the public. Your registered office address will also appear on the public register, although this does not have to be your home address.

Is there a good time to switch from being a Sole Trader to a Limited Company?

You might want to consider switching from sole trader to limited company once your profits start increasing, but there is no longer a simple profit figure at which incorporation automatically becomes more tax efficient.

The comparison will depend on a number of factors, including your level of profit, how much money you need to withdraw from the business, salary and dividend levels, Corporation Tax, National Insurance and any other income you have.

There are also non-tax reasons to incorporate, such as limited liability, bringing in shareholders or presenting a limited company structure to clients.

Your accountant will be able to advise you as to the best option for you and your business and work out whether it will be financially beneficial to make the switch.

What other trading options are available?

Being a sole trader or limited company aren’t your only options so let’s have a quick look at Umbrella Companies and SMEs.

Umbrella Companies

Umbrella companies don’t find work for you, but what they do is employ contractors on behalf of an employment agency or client.

You become an employee of the umbrella company for the period you are working with them, which means that the agency or client will usually pay the umbrella company. The umbrella then operates PAYE and deducts the relevant Income Tax and National Insurance before paying you your net salary.

You might consider working with an umbrella company for the associated employment rights. In addition, your tax is calculated, deducted and paid through PAYE, meaning less tax administration for you.

It can be a simple way to work on temporary contracts. Because you are employed and paid through PAYE by the umbrella company rather than providing the work through your own personal service company, the usual IR35 question for your own company does not arise for that engagement.

Bear in mind though that the amount you take home will depend on the assignment rate, umbrella margin and employment costs as well as PAYE deductions. For an outside-IR35 contract, working through your own limited company may produce a different result, so it is important to compare like with like.

From 6 April 2026, there are also new PAYE rules for labour supply chains which include umbrella companies. Where an agency supplies the worker to the end client, the agency is responsible for making sure the umbrella operates PAYE correctly. Where there is no agency, that responsibility falls on the end client.

The umbrella company itself still has responsibility for calculating and paying PAYE correctly, but HMRC can now recover unpaid PAYE from the relevant agency or end client if the rules have not been followed.

If you do choose to work with an umbrella company, make sure you do your due diligence as there are a number of non-compliant umbrella companies operating.

We recommend fully FCSA accredited umbrella company Clarity Umbrella – rated 5/5 by clients and offering same day payments as standard.

At Integro Accounting we offer an accountancy and payroll package called Easy Switch – this allows you to switch between an umbrella company and your own limited company to suit your latest contract at no extra cost!

SMEs

SME stands for small or medium-sized enterprise and is a broad term used to describe smaller businesses.

The precise definition of an SME can vary depending on the purpose for which the term is being used. There are also separate definitions of micro, small and medium-sized companies for company accounting and reporting purposes.

In practice, freelancers, contractors and owner-managed businesses will usually fall well within the definitions used for smaller businesses.

Talk to an expert

We all want to maximise our take home pay and reduce our tax bill where possible, so make sure you take advice about which route will be the most efficient and profitable for you.

Our team of expert accountants are always on hand to discuss this further, so feel free to call them on 0207 096 2659 or email christian@integroaccounting.com to explain your question.

Making sure you make the right decision from the outset gives you and your business the best foundation from the start.