Should freelancers register as a limited company or a sole trader?

When you first decide to take the leap and become a full-time freelancer, sorting out your taxes should be on the top of your list. Creating a self-assessment account is very easy, but there are a few details you need to decide on before getting stuck into setting up your account. The main one being whether you want to register as a limited company or as a sole trader.

Each option has its own pros and cons, so we’re going to take a look at each and give you all the info you need as a new freelancer, to make the right decision for you and your business

What is a sole trader?

When just starting out, a lot of freelancers choose to register as a sole trader, as it’s the simplest structure when deciding to become your own boss. A sole trader is someone who usually works alone or is the sole owner of their business. Effectively, you are the business. 

The biggest difference in the long run is that as a sole trader, you are completely responsible for your business’ losses and you are allowed to keep your business profits once you’ve paid tax on your total income.

What is a limited company? 

Becoming a limited company is a little trickier and it’s advised you get yourself an accountant to help you get the most out of this tax structure. Limited company means that a company is ‘limited by shares’ or ‘limited by guarantee’. Unlike being a sole trader, the business becomes separate from you as the owner. If your company is limited by shares, it means that your business has separate finances from your personal finances, so you wouldn’t be held personally responsible for any major business losses. 

There used to be more tax ‘perks’ in setting up a limited company, but there are still benefits depending on how much you earn and if you’re the sole employee of your company. It is always advised to seek advice if you choose this route as it can get complicated. 

Tax and national insurance

When you’re full-time employed you don’t have to worry about things like paying tax or paying your national insurance, as it comes straight out of your paycheck. However, when you’re the one in charge of making sure to pay HMRC, you need to be aware of what you need to pay and when. Although there are many similarities when paying tax and NI between being a sole trader and a limited company, there are also a few key differences to be aware of when choosing which to register as.

As a sole trader your first £12,500 is tax free and you’ll pay around 20% tax on your income up to £37,500. Once you begin to earn over £37,500 as a sole trader, you’ll move into a higher tax bracket and pay around 40% tax on your earnings. If you find yourself earning over £150,000 in a tax year, then you’ll pay around 45% tax on your profits. 

Example: If you earn £45,000 in a tax year, £12,500 of that income will be tax free, so you will only pay tax on the remaining £32,500. This puts you in the lowest tier tax bracket, which means you’ll pay 20% tax on that £32,500 resulting in a tax payment of £6,500 for that tax year.

National Insurance as a sole trader is paid depending on two different classes. Class 2 means that you have to pay NI once your profits are £6,475 or more a year, in class 4 you pay when your profits are £9,501 or more a year. Don’t forget that your profits are your income with all your business expenses deducted. 

If you choose to opt in as a limited company, then you will pay class 1 NI and it will be based on your earnings as an employed person. Like we mentioned before, when you become a limited company, your business finances will become separate from your own personal finances, so you effectively become your own employee and pay yourself a wage. Just like an employer would if you worked for a third party. 

As a director of your limited company, you will only pay NI once your salary exceeds £9,500 and income tax when your income exceeds £12,500 and this contribution will usually need to be paid in a lump sum when you submit your tax return, rather than being deducted weekly or monthly like you would if you were a standard employee. 

Essentially, owners of limited companies pay tax twice, as the company will pay corporation tax and you as a director will pay income and NI tax. Your company will pay tax based on its profits from trading, investments and selling assets during a tax year and as an employee of that company, you will pay income tax on your personal earnings as company director.    

Another aspect of being a limited company that you will have to think about, is setting up a PAYE scheme. This scheme manages the tax and NI that your employees pay, even if you’re the sole employee of your limited company, you need to set up PAYE. Having employees under your limited company can offer some tax relief as you can claim expenses for things such as company cars, health insurance and travel and entertainment expenses. There are also a few tax exemptions when it comes to employee expenses as you don’t have to declare costs for business travel, phone bills, business entertainment and uniforms or tools needed for work.

Dividends for shareholders

With a limited company’s finances being separate from the owners/shareholders, you may wonder how or if you can take money out of your business should you need or want to. The answer is yes, but only if your business makes a profit. If your limited company has turned a profit, then you are free to pay out a dividend to yourself as a shareholder, or any other named shareholders. 

This dividend is tax free for the company, so you will not be taxed for paying this sum out to any shareholders your business has. However, if the dividend being paid out is over £2,000 then the shareholder receiving it may have to pay income tax on that amount. Essentially, your company will not have to pay tax, but you might. To find out more about dividends, head over to

Which is best for a freelancer? 

Although limited companies do have some tax perks, they can be very complicated to manage on your own and you have to make a profit in order to legally withdraw dividends. With so many pros and cons attached to being a limited company, it’s best to make sure you have an accountant that can handle all of the legal and tax return side of things, in order to really get the most out of it. 

For freelancers, registering as a sole trader is a much easier option and you can manage your tax payments through ready-made software like QuickBooks, Sage or Xero. When you’re just starting out, you may not feel ready to commit to an accountant, so this is your best option to manage your finances quickly and easily. 

Remember, that if you get to a point in your freelancing career where you want to build a bigger empire, you can always change to a limited company further down the line. 

You can find our 2021 guide with 45 tools and tips for working from home and managing your freelance business in a handy FREE downloadable PDF HERE. We also have a FREE private members group where you can find support and guidance from an established freelance community, join HERE


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