You've been trading for three years. You're doing well. Your accountant says, "Ever thought about going Ltd?" You haven't. You don't really know what it means. You don't know if it's worth it. You're not even sure what changes.
Most tradespeople sit in that exact position. They understand being a sole trader. It's simple. You're the business. But a limited company is a legal entity. A concept. It feels complicated. It probably costs money. It probably brings hassle. So they don't bother.
That's often the right call. But sometimes it costs them money they shouldn't have lost. This guide tells you when it matters and how to actually do it.
Sole Trader vs Limited Company: The Actual Differences
First, clarity. What actually changes between these two structures?
Sole Trader: You own the business. The business is you legally. You're liable for everything. All debts, all legal claims, all damage. If someone sues, they're suing you personally. But it's simple to set up (basically nothing), simple to run, and you keep all the profits.
Limited Company: The company is a separate legal entity from you. You own shares in it. You're a director. The company has its own bank account, its own tax return, its own liability. If someone sues the company, they're not suing you personally. They're suing the company. Your personal assets are protected. But you have more administration and more compliance requirements.
That liability protection is the headline difference. Everything else flows from it.
The Tax Argument (The Real Reason People Incorporate)
If you earn £50,000 as a sole trader, you pay income tax on £50,000 (after expenses and allowances). In 2026, that's around £9,500 in tax.
If you earn £50,000 through a limited company, it works differently. You can take some as salary and some as dividends. You pay corporation tax on profits (around 25% in 2026 for profits over £50,000). Then you pay income tax on what you take personally. Properly structured, you can end up paying less total tax.
This is the carrot that makes people incorporate. "I'll save money on tax."
The truth: you might. If you earn good money. If you don't need all the profits immediately. If you can leave money in the company. But the savings aren't automatic. They depend on your specific situation.
Example: You earn £60,000. As sole trader, that costs you roughly £10,500 in tax. As a limited company, if you take £35,000 as salary and £25,000 as dividends, you pay corporation tax on £60,000 profit (£15,000), then income tax on your personal income (£6,500 roughly), total £21,500. That's worse, not better.
But if you earn £80,000 and only need £40,000 to live on, you can leave £40,000 in the company, pay corporation tax on just £40,000 (£10,000), income tax on your personal take (£7,000), total £17,000. As sole trader you'd pay £15,500 on the full £80,000. Only slightly better. The benefit increases as profits grow.
Talk to an accountant about your specific numbers. Don't assume limited company saves tax. It might. It also might not be worth the hassle.
The real tax wins come at higher income: Above £100,000 profit, a limited company structure can generate meaningful savings. Below £60,000, the benefits are marginal. At £60-£100,000, it depends on your specific situation. An accountant earning £200 to review this is money well spent.
The Liability Argument (Why It Actually Matters)
This is less discussed but more important for trades.
As a sole trader, if someone gets hurt on a job, if you cause property damage, if a contract dispute goes to court, the liability is personal. Someone wins a £20,000 court judgment against you, they can pursue your personal assets. Your van, your tools, money from your personal account.
As a limited company, they're pursuing the company. Its assets might be limited. Your personal assets are protected.
This matters less if you have good insurance (and you should regardless). But it matters if you're ever in a situation where insurance doesn't cover or a claim goes beyond coverage.
For high-risk trades (building, electrical, plumbing in customer properties), some people incorporate just for this protection. Not for tax. For safety.
The Actual Downsides of Incorporating
People underestimate the hassle. Let me be clear about what changes when you incorporate:
You need a bank account in the company's name. That's not hard. But transactions go through it, not your personal account. You manage company money separately.
You need a company tax return. More complex than self-assessment. Usually costs an accountant £400-£800 per year. You'll do this for as long as the company exists.
You need to file accounts with Companies House. Annual return, confirmation statement, accounts. Miss a deadline and you get fined. Company House is not forgiving.
You need to pay yourself via payroll. Even if you're the only employee, you need to run payroll software (£5-20 per month), sort PAYE taxes, submit monthly returns to HMRC. It's not hard but it's more than being a sole trader.
You need to comply with company law. Director duties, company records, keeping things documented properly. If you're sued and the court finds you've been sloppy, they can "pierce the corporate veil" and go after you personally anyway.
More expensive accountancy. Maybe not much more, but some. And you'll probably need accountancy support you didn't need as a sole trader.
It costs money to set up. Around £200-500 to incorporate, plus first year accountancy costs. £1,000-2,000 total for year one. You need to earn it back.
It's not brutal. But it's real. Don't think a limited company is "free." There's administration cost. There's time cost. There's mental energy cost. Don't incorporate unless the benefits outweigh these costs.
When It Makes Sense to Incorporate
You're earning over £70,000 per year consistently. The tax advantages start to show.
You work in high-risk trades. Electrical, building, plumbing in customer properties. If something goes wrong, the liability protection matters.
You want to build a business to sell later. Buyers prefer buying a limited company over inheriting sole trader relationships. If exit is on your mind, limited company is cleaner.
You're hiring employees regularly. Not essential, but slightly cleaner administratively if you're already running payroll software.
You have significant equipment or vehicle assets. Holding assets in a company structure can have advantages.
You've had a bad experience with someone suing you. Once bitten, the liability protection feels worth the cost.
Otherwise, probably don't. If you're earning £40,000, the tax savings are minimal. If you're doing domestic work for end customers, liability risk is lower. If you're happy flying solo, the administration burden isn't worth it.
How to Actually Incorporate
If you've decided to do it, here's the process:
Choose a company name: Has to be different from existing registered companies. Check Companies House website. Be creative or generic. Both work. Avoid words that require approval (bank, insurance, charity).
Choose a registered office address: Can be your home address, though many people use an accountant's office to look more professional. Has to be a UK address.
Set your memorandum and articles. Basically constitutional documents. Standard templates work for most trades. Your accountant can help.
Apply for incorporation: Go to Companies House website. Fill in the application form online (Form IN01). Pay the fee (£9 online, more by post, more for same-day processing). Takes 3-5 days for approval.
Get a company bank account: You'll need your Certificate of Incorporation from Companies House. Take it to your bank. Open a company account. Usually takes a day or two.
Notify HMRC: They'll contact you automatically usually. You'll need to register for corporation tax. Get a UTR (Unique Taxpayer Reference) number.
Set up payroll: Even if you're paying yourself. Use software like Sage, Xero, or cloud-based payroll services. Calculate your salary. Run monthly payroll. Submit to HMRC.
Set up accounting: Either do it yourself with software, or hire an accountant. Track expenses, income, invoices. At year end, prepare accounts and file with Companies House.
Total cost to incorporate: around £300. First year total cost with accountancy: £1,000-2,000. Ongoing annual cost: £800-1,200 for accountancy.
Should You Incorporate If You're Already Trading?
If you're currently a sole trader and you're thinking about incorporating, you need to transfer the business. This is more complex than starting fresh as a limited company.
You'll typically transfer the assets (equipment, goodwill) to the company. There can be tax implications. You might have to pay capital gains tax. You might have to deal with customer contracts. Customer invoices need to switch from personal to company.
This is genuinely worth paying an accountant for. Expect £500-1,500 to do this properly. But do it properly, because HMRC can challenge badly-done transfers.
If the numbers make sense (you're earning enough for tax savings to matter), then yes, do it. If you're on the fence, wait. Only incorporate if the benefits clearly exceed the costs and hassle.
One Year Later: Is It Worth It?
You incorporated. Now what?
If you did it for tax reasons, run the numbers at year end. Did you actually save money after accounting fees? If yes, great. If no, you can always go back to being a sole trader (though it's more paperwork).
If you did it for liability protection, that's less measurable. But you sleep better knowing your personal assets are separate. That's worth something.
Most people who incorporate at the right time don't regret it. Most people who incorporate too early resent the admin. Time it right and incorporate for the right reasons.