One of the biggest decisions for UK freelancers and contractors is whether to operate as a sole trader or set up a limited company. Each structure has different tax implications, admin requirements and legal protections.
Sole Trader Tax
As a sole trader, you pay income tax on all profits and Class 2 + Class 4 NI. Profits are taxed at the same rates as employment income. It’s simpler to set up and run but offers no liability protection.
Limited Company Tax
A limited company pays corporation tax (25% on profits over £250,000, 19% on profits under £50,000, with marginal relief in between). Directors typically pay themselves a small salary and take the rest as dividends, which are taxed at lower rates than salary and don’t attract NI.
When Does Going Limited Make Sense?
Generally, if your annual profits exceed £30,000–£40,000, a limited company starts to become more tax-efficient. However, you must weigh the additional admin costs (accounts, company filings, payroll) against the tax savings.