Sole trader or limited company, without the theatre

There are two costumes people reach for. Sole trader: you and the business are the same legal person, and you are taxed on the profits. Limited company: a separate legal person that you own and usually direct, which pays Corporation Tax on its profits and then pays you by salary, dividend, reimbursement, or a mix. Neither costume makes customers appear. Each one changes liability, paperwork, and how money is allowed to come home.

Start with the allowance, not the company

If your gross trading income is small, you may not need a company and you may not even need a tax return. The trading allowance for the 2026/27 tax year is £1,000. It is a relief against gross trading income, not against profit. If your total gross trading and miscellaneous income of the sort the allowance covers is £1,000 or less, you often do not have to tell HMRC, provided none of the exceptions apply. Exceptions exist. Income can still matter for other systems, including benefits calculations, even when income tax is covered by the allowance.

From 6 April 2027 the allowance is due to rise to £3,000, and the Self Assessment reporting threshold for trading income is due to rise with it. Until that date, the £1,000 figure is the one to use. Do not file 2026/27 as if the future rule were already in force.

Once gross income goes over the allowance, the usual next step is Self Assessment. Register with HMRC, keep records of income and allowable expenses, and report. If you need to register, the ordinary deadline is 5 October following the end of the tax year in which you started needing to. Miss it and you have not invented a clever delay. You have created a penalty conversation.

What a sole trader actually is

A sole trader is not a brand name on a cake box. It is you, trading. You can use a business name, and if you do, you still need to put your own name on certain customer paperwork and follow the business-names rules. You can hire people. You can be VAT registered. You remain personally liable for the debts of the trade. That last sentence is the one templates whisper past on their way to a formation fee.

Profits are taxed as your income. Class 4 National Insurance is charged on profits above the lower profits limit. The rates and thresholds are set for each tax year. Since April 2024, many self-employed people at or above the small profits threshold have been treated as having paid Class 2 contributions for benefit purposes without a separate compulsory Class 2 bill, and people below that threshold can often pay Class 2 voluntarily if they want the contributions record. Check the year you are in. Do not inherit a 2019 explainer from a forum.

Making Tax Digital for Income Tax has a published timetable that has already moved once and may be worth re-reading on GOV.UK the week you start. As published for readers this autumn, sole traders and landlords with qualifying income over £50,000 are in scope from 6 April 2026, and those over £30,000 from 6 April 2027, with a further step down later. If your qualifying income is near a line, assume the software question is coming and confirm the date rather than hoping the timetable slips again.

What a limited company changes

A private company limited by shares is incorporated at Companies House. You will choose a name, a registered office, directors, shareholders, people with significant control, and a statement of capital. Online filing is the ordinary route. The fee is whatever Companies House lists on the day you file, so look it up rather than trusting a blog that froze a number in 2024. Identity verification for directors and people with significant control is part of the Economic Crime and Corporate Transparency Act regime. Follow the live Companies House instructions. A formation agent can type faster than you. They cannot know your PSC position if you have not told them the truth about who really owns and controls the company.

The company, not you, enters contracts if you let it. That is the point of limited liability, and it is also the point that fails when you sign personal guarantees, mix the bank accounts, or treat the company card as a household wallet. Courts and liquidators are unromantic about this. So are banks.

You must register the company for Corporation Tax with HMRC within three months of starting to do business. Accounting periods, annual accounts, and a confirmation statement are recurring obligations even if you are bored. A company that never trades still has filing duties until it is properly closed. Dormant is a status, not a vibe.

Corporation Tax, in one paragraph you can check

For a standalone UK trading company with a twelve-month period and no associated companies, taxable profits up to £50,000 are charged at the small profits rate of 19 percent. Profits of £250,000 and over are charged at the main rate of 25 percent. Between those bounds, marginal relief reduces the 25 percent rate. Short periods and associated companies split the limits. If you have another company, or a spouse's company that counts as associated, do not apply the headline bands as if you were alone.

Salary, dividend, and the story people tell themselves

Directors often pay themselves a modest salary through PAYE and take further money as dividends. Dividends are not a business expense in the way a salary is. They can only be paid out of distributable profits, with the paperwork a company is supposed to keep. A small dividend allowance exists. In recent years it has been £500. Confirm the allowance for the tax year in which the dividend is paid, because it has been cut before and "I think it is still £500" is not a filing position.

A limited company does not, by itself, put you outside the off-payroll working rules. If you sell your own labour through a company to a medium or large client, that client may have to decide your employment status for tax. Small clients follow a different rule. IR35 folklore is where expensive mistakes get a nickname. If your work is "I show up and do what their manager says, on their hours, with their kit", a company wrapper is a question for an adviser, not a cloak.

VAT is a turnover test, not a profit test

For a business established in the UK, compulsory VAT registration normally arises when taxable turnover goes over £90,000 in the last twelve months, or when you expect it to go over £90,000 in the next 30 days alone. Taxable turnover includes zero-rated sales. It is not the same thing as exempt income, and it is not your profit. The historic test is checked as you go, not only at your year end. The deregistration threshold sits at £88,000. Both figures have applied since 1 April 2024. The Budget 2026 material we have seen keeps them in place into 2027, but you should still read the current VAT Notice 700/1 supplement before you rely on them.

If you cross the line, 20 percent standard-rate VAT has to be accounted for. You either raise prices, accept a cut, or discover that some of your costs now carry recoverable VAT and the net effect is less brutal than the headline. There is also the Flat Rate Scheme and other special schemes. They are not automatically kinder. Run the numbers with your own mix of costs.

Businesses that are not established in the UK often cannot lean on the £90,000 threshold for taxable supplies here. That is a different essay, and if it is you, it is an adviser conversation rather than a blog conversation.

A plain way to choose, still not advice

Stay a sole trader a while longer if the trade is small, the risk of being sued for large sums is modest, you do not need to retain profits inside a company, and the admin of accounts and confirmation statements would be theatre. Look hard at a company if customers or contracts require it, if you are retaining profits, if you have co-founders who need shares rather than a handshake, or if liability is no longer theoretical because you sell a product that can injure someone or advice that can be relied upon. Even then, insurance and a contract often matter more than the certificate. Read the operating system beside this piece.

Do not incorporate to look older than your revenue. Do not stay a sole trader out of nostalgia once the liability, the people, or the retained profit have outgrown you. And do not treat this page as the filing. The desk at 25 Sansome Pl, Worcester can argue with a paragraph. HMRC will argue with your return.