As a freelancer in the UK, one of the first essential choices you’ll face is whether to work as a sole trader or set up a limited company. In 2025, shifts in the business landscape are likely to affect how freelancers manage their money, build their reputation, and grow their businesses.
Interestingly, the number of self-employed people has dropped by 4%, with even larger declines in partnerships. This illustrates that many are moving away from the traditional sole trader model.
How do you decide which path is right for you?
We, at Work Your Way, help you clarify things after you’ve made the decision, knowing it can be a challenging one.
This article explains the key differences between being a sole trader and running a limited company. We’ll cover essential topics like taxes and how to set up each option. You’ll get the practical information you need to make an informed choice.
By the end, you’ll know which option suits your freelance business best.
Ready? Let’s get started.
Key Differences Between Sole Trader and Limited Company
Here’s a detailed comparison between becoming a sole trader and running a business:
| Aspect | Sole Trader | Limited Company |
| Meaning | A sole trader is a self-employed person who runs their business on their own. | A limited company is a separate legal entity which is operated by the owner independently. |
| Set Up | Signing up with HMRC is a quick and easy process. You can start trading immediately after registration. | Registering a company with Companies House takes more time and incurs additional costs.The process includes drafting a company constitution and choosing directors. |
| Liability | Unlimited liability | Limited liability |
| Taxation | Income tax on profits and National Insurance Contributions (NIC) | Corporation Tax on profits, with the option to pay yourself a salary and dividends. |
| Admin & Paperwork | Minimal: Just file a self-assessment tax return | More paperwork: Requires annual accounts, Corporation Tax returns, and additional legal filings. |
| Credibility | May appear less professional, especially to larger clients. | Higher credibility and professionalism, making it easier to attract bigger clients. |
| Cost | No ongoing costs other than tax registration. | Higher costs for accounting, legal filings, and compliance with regulations. |
| Pros | Simple, low-cost setup, minimal paperwork, and direct control over your business. | Limited liability, potential tax savings, greater credibility, and more opportunities for business growth. |
| Cons | Unlimited liability, limited tax benefits, and may seem less professional to some clients. | More complex and costly setup, increased admin, and legal responsibilities. |
Tax Implications and Setup Process
When it comes to taxes, sole proprietorships and limited companies are quite different. As a sole trader, you pay taxes on your income, which can be between 20% and 45%, depending on how much you earn. You also need to make NIC for classes 2 and 4. This process is simple since you only need to file an annual self-assessment tax return. But, sole traders don’t enjoy the same tax benefits as limited companies.
According to a report from Crunch Accounting, sole traders need to set aside a portion of their earnings for Income Tax and National Insurance. If you earn up to £50,000, reserve 25% of your income. For profits up to £100,000, keep 40%. If your profits range from £100,000 to £150,000, save 45%.
On the other hand, a limited company pays Corporation Tax, which is currently 19% on profits. As a director, you can receive a salary, subject to PAYE, and dividends, which are taxed at a lower rate than your actual salary. This setup can be more beneficial for tax purposes, especially as your business expands. You can also retain profits in the firm to support reinvestment and expansion.
Starting as a sole trader is a quick and cheap option. You only need to inform HMRC of your self-employment status, and you can start trading immediately. There’s no need to register with Companies House or handle complicated paperwork, making it ideal for individuals new to business or those running a small business.
Starting small doesn’t mean you have to stay small; it simply means you can start small and build from there. If you want to grow your side hustle, having the right plan can help you move forward confidently.
On the flip side, setting up a limited company takes more steps. You must register with Companies house, create Articles of Association, appoint directors, and keep detailed financial records. You need to file your financial statements and tax returns every year. While this process needs more time and money, it offers benefits such as limited liability and improved tax efficiency, particularly as your business expands.
As your earnings increase, think about long-term ways to manage your money. One of the guides highlights five key financial habits for freelancers that can help you improve your finances.
Which is Right for You in 2025 – Sole Trader or Limited Company
Your choice between being a sole trader or running a limited company depends on how you want to establish your business this year.
No matter what path you take, it is important to protect your income and prepare for unexpected challenges. A survival guide will help you. It offers valuable resources and support services to help you stay proactive.
Sole Trader
If you’re starting small, prefer simplicity, and are willing to accept personal responsibility, being a sole trader may be the best option. It’s cost-effective, requires less paperwork, and is easy to get started.
Limited Company
If your business is growing and you want to protect your assets, attract larger clients, or maximise tax benefits, a limited company is likely the better alternative. It requires more setup and ongoing compliance, but the benefits in terms of credibility, tax savings, and liability protection can be very worthwhile.
If you have any questions, talk to an accountant or business advisor. They can help you make well-informed decisions and find the best approach for your specific situation.
Conclusion
Choosing between being a sole trader or forming a limited company is a key decision for freelancers. Each option has its advantages, and the best choice depends on the size of your business, your goals, and your plans.
Take the time to carefully consider your options, and feel free to seek expert advice to set your business up for long-term success. Remember, the right choice now can lead to more opportunities later.
You can do this. Move forward and build your future with confidence.
