Let’s start with the question everyone asks
If you run a growing business, sooner or later you’ll ask:
“When should I stop being a sole trader and become a limited company?”
Maybe your profits are up, maybe a new client insists on dealing with a company, or maybe you’ve heard you’ll “save tax” once you hit a certain figure.
The truth? There’s no single profit number where it magically makes sense but there is a clear point where the balance of tax, liability, and credibility tips in favour of incorporating.
Let’s walk through it together, step-by-step.
Quick answer (before we dive in)
You’re probably ready to go limited when:
- your profits are stable and comfortably above the basic-rate band,
- you’re taking on larger contracts or higher risk, or
- you want the flexibility to add co-owners, investors or staff.
But if you’re planning to buy or remortgage in the next 2–3 years, read the mortgage section first incorporation can affect what lenders see as your income.
What actually changes when you go limited
| Sole Trader | Limited Company | |
|---|---|---|
| Legal status | You are the business – full personal liability | Company is a separate legal entity; limited liability |
| How you’re taxed | Income Tax + Class 4 NIC on profits | Company pays Corporation Tax; you pay PAYE + dividend tax |
| Admin | Simple Self Assessment | Annual accounts, Corporation Tax return, confirmation statement |
| Perception | Personal brand | More formal, often required for contracts |
| Mortgage view | Based on SA302 & accounts | Based on salary + dividends drawn |
You’ll also still need to watch the VAT threshold once your 12-month turnover passes £90,000, registration is mandatory (GOV.UK VAT thresholds).
(Internal link → DIY Bookkeeping Checklist (UK 2025/26) for staying compliant)
2025/26: the key tax numbers to know
- Corporation Tax: 19 % up to £50 k; 25 % above £250 k, with marginal relief in between (GOV.UK)
- Dividend Tax: 8.75 % / 33.75 % / 39.35 % after the £500 allowance (GOV.UK)
- Class 1 NIC (employees/directors): 8 % employee rate; employer NIC 15 % above £5 k threshold (GOV.UK)
- Class 4 NIC (self-employed): 6 % £12,570–£50,270; 2 % above that (GOV.UK)
- Voluntary Class 2 NIC: optional ~£3.50 pw to protect benefit entitlements (GOV.UK)
(Internal links → How to Pay Yourself as a Director (UK 2025/26) and NIC, PAYE & Pension Costs Explained)
Making Tax Digital (MTD ITSA) what it really means for you
You’ve probably seen headlines about Making Tax Digital for Income Tax (Self Assessment) but what does it actually change?
If you’re a sole trader or landlord, MTD ITSA means you’ll stop submitting one big yearly return. Instead, you’ll send quarterly updates through approved software (like Xero or QuickBooks) and a final declaration after year-end.
| Start Date | Who it applies to | Income threshold | What changes |
|---|---|---|---|
| 6 Apr 2026 | Sole traders & landlords | Over £50,000 total business/property income | Quarterly updates + final declaration |
| 6 Apr 2027 | Over £30,000 | Same process | |
| Planned phase (after 2028) | Over £20,000 | HMRC will confirm later |
If you already use software for bookkeeping or VAT returns, you’re halfway there.
For many business owners approaching £50k+ profits, this change makes it easier to justify incorporating sooner, since you’ll need digital records and quarterly reporting either way.
MTD ITSA doesn’t force you to go limited but it does mean the days of spreadsheet-only accounts are numbered.
Going limited can make sense if you’re already stepping up your financial systems.
Rolling 52-Week Cashflow Forecast Kit for keeping records MTD-ready
Ten signs you’re ready to go limited
- Consistent profits and growth
- Larger contracts with greater liability
- Clients prefer Ltd status
- You’re adding partners or co-owners
- You want to build pension contributions into the business
- You qualify for company-only reliefs (e.g. R&D)
- You’re building a brand you might sell
- You’re taking on staff
- You’re near the VAT threshold (£90 k)
- You want clearer separation between personal and business cashflow
When it’s better to stay as you are
If profits are still small or unpredictable, admin isn’t your thing, or you’re planning a mortgage in the next 2–3 years, it may be worth staying as a sole trader for now, speak to a broker during the decision process.
You can always incorporate later when things stabilise.
💷 Mortgages why your structure matters
Most lenders treat directors owning 25 %+ shares as self-employed.
They’ll usually ask for 2–3 years of accounts or SA302s, and base affordability on salary + dividends, not retained profits.
If you only pay yourself a small salary for tax efficiency, your income can look lower on paper, especially to high-street lenders.
Useful guides:
- Barclays – Self-Employed Mortgages
- NatWest – Self-Employed Mortgages
- Halifax – Self-Employed Criteria
💡 Tip: if you plan to buy or remortgage within 2–3 years, speak to a broker before switching.
Ask if they’ll use your sole-trader history and whether retained profits count toward income.
Real-world example £50 k available after Corporation Tax
Let’s compare how much you’d actually take home if £50 k was available for drawings (after the company has already paid its Corporation Tax).
Sole Trader
- Profit £50,000
- Less allowance £12,570
- Income Tax 20 % = £7,486
- Class 4 NIC 6 % = £2,245.80
- Take-home £40,268
Limited Company (post-CT funds)
- Salary £12,570
- Employer NIC 15 % = £1,135.50
- Dividends £36,294.50
- Dividend Tax 8.75 % = £3,133
- Take-home £45,732
| Sole Trader | Ltd Company (post-CT) | |
|---|---|---|
| Net take-home | £40,268 | £45,732 |
| Difference | ≈ £5,460 better off |
💬 The company has already paid Corporation Tax before this £50 k is available.
But it shows how mixing salary + dividends boosts efficiency once you’re beyond the £50 k mark.
For more information check our How to Pay Yourself as a Director (UK 2025/26) guide.
So is it time for you?
At roughly £50 k+ drawings, a limited company can leave you around £5 k better off, even before you add pensions or spouse share planning.
Below that, simplicity still wins.
The right answer depends on your goals, risk, and cashflow confidence not just your tax rate.
Your next step
If you’d like to see your personal break-even point, book a free Clarity Call.
We’ll compare your sole-trader vs limited-company take-home, show your Corporation Tax and NIC impact, and discuss how it fits your mortgage and growth plans so you can keep more of what you earn with full clarity.
FAQs – real questions business owners ask us!
1. Is there a profit level where going limited always wins?
Not automatically. It depends on your mix of salary, dividends and pension. Around £50–60 k profit, the numbers usually start to favour a company, but it’s not the only factor.
2. Do I need to register for VAT when I incorporate?
Only if your rolling 12-month turnover exceeds £90,000 or you expect it to within 30 days. You can register voluntarily earlier if it helps reclaim input VAT.
3. Will MTD ITSA force me to incorporate?
No. It only changes how you report income (quarterly updates through software). If you’re already digital, incorporation becomes easier but not compulsory.
4. Can I still get a mortgage with a small salary?
Yes, though lenders usually assess your salary + dividends, not profits left in the company. That’s why we recommend mortgage advice before you restructure.
5. What about Corporation Tax where does it fit in?
The company pays it before any drawings. The example above shows take-home after that tax is already paid.