Every guide tells you a limited company is more tax efficient, and then quietly skips the part where it costs more to run, takes more of your time, and puts your accounts on public record. The threshold where incorporating actually pays has moved, and for a lot of Manchester businesses it is higher than they have been told.
The comparison, first
| Sole trader | Limited company | |
|---|---|---|
| Legal status | You and the business are the same | Separate legal entity |
| Liability | Unlimited personal liability | Limited to your shares |
| Tax on profit | Income tax at 20/40/45% plus Class 4 NI | Corporation tax, then tax on how you extract it |
| Accounts published | No | Yes, at Companies House |
| Setup cost | Free | £50 filing fee, plus formation help |
| Annual accountancy | £300 to £800 | £900 to £2,000 |
| Admin burden | One self assessment | Accounts, CT600, confirmation statement, self assessment |
| Getting money out | Just take it | Salary and dividends, with process |
The verdict in one line: below roughly £50,000 of profit, sole trader is usually the right answer. Above it, a company starts to win, and the margin widens as profits rise.
Where the break-even sits in 2026
Around £50,000 of annual profit for an owner who draws most of what the business earns.
That figure is higher than the £30,000 you will still see quoted, and the reason is the dividend allowance. It has fallen to £500, so more of what you take out of a company is taxable than it used to be. HMRC's guidance on tax on dividends sets out the rates that apply above that allowance.
Below the break-even the tax difference is small enough that the extra accountancy fees and admin eat it. At £40,000 of profit you might save a few hundred pounds in tax and spend more than that on the company's accounts.
Above it the gap widens. Between £60,000 and £100,000 of profit, incorporating typically saves £1,500 to £6,000 a year, mostly because corporation tax on retained profit is lower than higher-rate income tax plus National Insurance, and because you control the timing of what you take out.
Two things move the break-even for you specifically:
Do you need all the money? The company advantage comes largely from retaining profit and extracting it deliberately. If you draw every penny each year, most of the benefit disappears.
Are you near a threshold? Profit that pushes you into the higher rate as a sole trader, or past the point where personal allowance starts tapering, changes the arithmetic sharply. The income tax rates and bands are where to check the current figures.
Liability, which matters more than tax
The tax question dominates the conversation and the liability question decides more cases.
As a sole trader there is no legal distinction between you and the business. A claim against the business is a claim against your house, your savings and your car.
A limited company is a separate legal person. If it fails, creditors have a claim against the company, not against you personally, provided you have not given personal guarantees and have not traded wrongfully.
Two caveats worth knowing. Directors who keep trading while knowingly insolvent can be held personally liable. And banks, landlords and major suppliers routinely ask directors of small companies for personal guarantees, which puts the liability straight back on you for that specific debt. Read those before signing, and take advice from a commercial solicitor if the sums are significant.
If you work in a field where something can genuinely go wrong at a scale larger than your insurance, incorporate regardless of the tax position.
What a company actually costs to run
The honest annual figures for a small Manchester company:
- Accounts and CT600, £500 to £1,500 plus VAT
- Director's self assessment, £150 to £400
- Confirmation statement, £34.80 filing fee plus handling
- Payroll if you take a salary, £25 to £50 a month minimum
So £900 to £2,000 a year in total, against £300 to £800 for a sole trader. That difference of roughly £600 to £1,200 is the hurdle the tax saving has to clear before incorporating is worth it, which is what accountants charge doing most of the work in the decision.
Add the time. Company filings have hard deadlines with automatic penalties. Companies House publishes your accounts and your registered office address, and your name and month of birth appear on the public register. For some people that is fine. For others, running a business from home, it is the thing that decides it.
Three reasons to incorporate that are not about tax
Clients require it. Plenty of larger companies and public sector bodies will not contract with sole traders, partly because of IR35 and partly because of procurement policy. If your pipeline depends on those clients, the decision is made for you.
You want to bring someone in. Shares are how you give somebody a stake, take investment, or set up an option scheme. A sole trader has nothing to divide.
You are building something to sell. Selling a company is a share sale, which is a clean and well-understood transaction. Selling a sole trade is selling a collection of assets and goodwill, which is messier and usually taxed less favourably. Exit planning is the point at which most owners first meet a specialist tax adviser.
Transferring an existing sole trade into a company can trigger a capital gains charge on goodwill, and there are reliefs that may apply. This is a genuinely technical area where the order of events changes the tax. Get advice before you transfer anything, not after.
How to actually incorporate
Registering is straightforward and cheap. You can do it directly through Companies House for a £50 filing fee, and most people are trading within 24 hours.
The mechanics are the easy part. What needs thought is everything around it:
- Share structure. Who holds what, and whether you need more than one class. Easy to set up, expensive to unpick later.
- Salary and dividend split. This is the decision that determines your tax bill each year and it should be reviewed annually, not set once.
- A separate business bank account. Legally the company's money is not yours, and mixing them creates a director's loan account nobody enjoys untangling.
- Contracts and registrations. Clients, suppliers, insurance, VAT registration and any licences all need moving to the new entity, and none of it happens automatically.
If the numbers are large or there is goodwill in the existing business, this is the point to involve a tax adviser rather than doing it and asking afterwards.
The case for waiting
Staying a sole trader is a perfectly good decision, and the pressure to incorporate often comes from people who sell company services.
Wait if your profit is below £50,000 and stable, if you draw everything you earn, if your work carries little liability risk, or if you value the privacy of not having your accounts on public record. You can incorporate later at any time, and doing it once the business has proven itself is cheaper than doing it twice. If you do go ahead and your current firm is not set up for company work, moving accountants is a good moment to combine with it.
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Key takeaways
- The break-even for incorporating sits near £50,000 of profit in 2026, higher than commonly quoted, because the dividend allowance has fallen to £500.
- A company costs £600 to £1,200 a year more to run. The tax saving has to clear that first.
- Above £60,000 profit, incorporating typically saves £1,500 to £6,000 a year.
- Limited liability is often the stronger reason, but personal guarantees put that liability straight back on you.
- A company publishes its accounts and your details at Companies House.
- Transferring an existing sole trade can trigger a capital gains charge on goodwill. Take advice before, not after.
Frequently asked questions
At what profit should I incorporate?
Around £50,000 for most owners who draw most of what they earn. Below that the tax saving rarely covers the extra £600 to £1,200 a year in accountancy and admin. Above £60,000 the gap widens meaningfully. Your own answer depends on how much you leave in the business.
Can I be a sole trader and have a limited company?
Yes. Plenty of people run a company for one activity and a sole trade for another, or keep a small freelance income alongside. Keep the finances and records genuinely separate, and be careful about VAT, where artificially splitting one business across two entities to stay under the threshold is challenged by HMRC as disaggregation.
Do I have to pay myself a salary from a limited company?
No, but most directors take a small salary because it preserves a National Insurance record and is a deductible expense for the company. The rest comes out as dividends, which are taxed differently. The split should be reviewed each year rather than set once and forgotten.
Will incorporating protect me from everything?
No. Limited liability protects your personal assets from company debts, with important exceptions. Personal guarantees, which lenders and landlords routinely require from small company directors, bypass it entirely. So does wrongful trading. And it never protects against your own negligence in a professional capacity, which is what indemnity insurance is for.
Are my accounts really public?
Yes. Small companies file abridged accounts, which is less detail than a large company, but turnover bands, balance sheet figures, your name and your month of birth are all publicly searchable at Companies House. Anyone can look, including competitors and clients.
What happens to my business name?
A sole trader trading name has no automatic protection. Incorporating with that name registers it at Companies House, which stops another company registering the same name but is not a trademark and does not stop someone trading under something similar. If the name matters commercially, that is a separate registration.
Can I switch back to being a sole trader?
Yes, by closing the company, but it is more involved than incorporating and can have tax consequences depending on how you extract the remaining assets. Striking off is straightforward for a company with no assets or debts. It is not a decision to reverse casually, which is the argument for waiting until you are reasonably sure.
Does IR35 affect this decision?
If you work through your own company for a single client in a way that resembles employment, the off-payroll rules can require tax to be deducted as if you were employed, which removes most of the advantage. Anyone contracting through a personal service company should understand their status before incorporating for tax reasons.
What about VAT?
VAT registration is separate from company structure and is driven by taxable turnover, not by whether you are incorporated. Registering voluntarily below the threshold can make sense if your customers are VAT registered and you have significant input VAT to reclaim, and it is a poor idea if you sell mainly to consumers.
How long does it take to set up a company?
Registration is usually approved within 24 hours online and costs £50. Opening a business bank account takes longer, typically one to three weeks with identity checks. The genuinely slow part is moving contracts, insurance and registrations across, which is worth planning before you incorporate rather than after.
