A landscaper asks his accountant whether he should incorporate. The accountant asks what he made last year. £31,000. The accountant says probably not yet, and the landscaper's brother-in-law, who incorporated in 2015, says that is terrible advice because he saved thousands.
They are both right, at different profit levels, in different years, and the brother-in-law's saving was larger in 2015 than the same arrangement produces now.
The liability question comes first, not the tax
A sole trader and the business are the same legal person. Business debts are your debts. If the business owes £60,000 it cannot pay, creditors can pursue your personal assets, including in principle your home.
A limited company is a separate legal person. Its debts are its own, and if it fails, shareholders lose what they put in and no more. That is the point of incorporation and it is the reason the structure exists.
The protection is real but narrower than people assume. Bank lending to a small company is routinely supported by directors' personal guarantees, which put the debt back on you. Landlords frequently want a guarantee on a lease. Directors can be made personally liable for wrongful trading under the Insolvency Act 1986 if they keep trading when they knew or ought to have known there was no reasonable prospect of avoiding insolvent liquidation. And professional negligence is not laundered by incorporation.
Even so, a business with employees, premises, stock or meaningful third-party risk is in a different position from a consultant working from a spare room, and that difference usually points one way.
The tax comparison has narrowed
The classic incorporation saving worked like this. A company pays Corporation Tax on its profits. The director takes a small salary, at a level that preserves a National Insurance record without triggering much employer or employee NI, and takes the rest as dividends. Dividends carry no National Insurance at all, and historically the dividend tax rates were low with a generous allowance. Comparing that with a sole trader paying income tax plus Class 4 NI on the whole profit, incorporation won comfortably.
Three things closed the gap.
- Dividend tax rates were introduced and then increased. They stood at 8.75% for basic rate, 33.75% for higher rate and 39.35% for additional rate taxpayers, and increases have been announced since, so confirm the rate applying in the current tax year before relying on a comparison.
- The dividend allowance was cut repeatedly, from £5,000 when introduced to £500 from April 2024.
- Corporation Tax stopped being a flat 19%. From April 2023 the main rate is 25% on profits above £250,000, with a small profits rate of 19% up to £50,000 and marginal relief between the two, which produces an effective marginal rate of 26.5% on profits in that band.
The net effect is that at modest profits the difference between the two structures is often a few hundred pounds a year in either direction, which is not enough to justify a change of structure on its own. The advantage reopens at higher profits, and particularly where you do not need to draw all of the profit, because a company lets you leave money inside it taxed at the Corporation Tax rate and take it out in a later year.
Do not treat any rule of thumb about a crossover point as durable. Run the comparison on your own numbers for the current year, and run it again if rates move.
The admin is not trivial and it is public
A sole trader registers for Self Assessment and files one return a year. That is very nearly the whole of it.
A limited company is a good deal more. You register at Companies House. You file annual accounts and a confirmation statement. You file a Company Tax Return and pay Corporation Tax nine months and one day after the year end, which is before the filing deadline for the return itself. You run a payroll for your own salary, with Real Time Information reporting on or before each payday. You file your personal Self Assessment as well, because the dividends and salary go on it. You maintain statutory registers, including the register of people with significant control.
You also accept director's duties under the Companies Act 2006, which are legally enforceable obligations rather than formalities, and the Economic Crime and Corporate Transparency Act 2023 has introduced identity verification requirements for directors and people with significant control, alongside greater Companies House powers to query and reject filings.
And it is public. Anyone can look up your company's accounts, your directors, your registered office and your filing history at Companies House, for free, in a few seconds. Small companies can file abridged or filleted accounts, though the reforms under the 2023 Act move towards fuller disclosure. Competitors, customers and prospective employees all do look.
Set against that, the company name carries weight in some markets. Certain clients, particularly larger firms and public bodies, prefer or require suppliers to be incorporated, and some will not engage a sole trader at all.
How to decide, in order
Start with risk. If a bad month could produce a liability larger than your savings, incorporate.
Then look at profit and at what you draw. If profit is modest and you take all of it, the structures are close, and the sole trader route costs less to run. If profit is substantially above what you need to live on, the company gives you a timing choice that the sole trader route does not.
Then look at who you sell to, and whether incorporation opens or closes doors.
Then look honestly at your tolerance for administration, because a company that files late incurs automatic penalties at Companies House and further penalties from HMRC, and the cheapest structure is the one you actually keep on top of.
Finally, remember it is not irreversible. Sole traders incorporate all the time, and it is a well-worn route with its own tax treatment for transferring the business and any goodwill. Going the other way is possible too, though messier. Get advice for the transition itself, because that is where the avoidable mistakes live.
Where this shows up in the game
In Business Baron the structure you choose changes what happens when things go badly. As a sole trader, a failed business follows you. As a limited company, it does not, unless you signed a guarantee, and the bank usually wants one. The tax difference is modelled across the full 1930–2040 span, so the answer genuinely changes decade by decade as rates move. The free game has no time limit, which is long enough to choose wrong and find out why.