A note on what this is. This is an illustrative composite rather than an interview with a named tradesperson, and nothing below is quoted from an individual. It sets out the decision the way it actually presents itself to a sole trader who is doing well enough to start wondering whether Ltd after the name would change anything.
Why people actually incorporate — tax is only half of it
The tax saving is the reason everyone gives. It is rarely the reason that finally tips it. The more common trigger is commercial: losing a job because the company doing the hiring only contracts with limited companies, usually for insurance or procurement reasons rather than snobbery. That is the moment incorporation stops being a theoretical spreadsheet exercise and becomes a piece of lost income with a name attached.
The second, quieter reason is that being on the Companies House register makes you legible to people who are deciding whether to trust you with a large job. Whether that is fair is a separate argument — plenty of excellent sole traders are turned down by procurement rules that tell you nothing about the quality of the work — but it is how a lot of commercial buying actually operates.
The tax saving is usually what gets people looking. Losing a job they wanted is what gets them filing.
What the tax difference actually looks like
As a sole trader you pay Income Tax and Class 4 National Insurance on your profits, whatever you do with the money — there is no distinction between the business's money and yours, because legally there isn't one.
As a limited company, the company pays Corporation Tax on its profit first. The small profits rate is 19% on profits up to £50,000 and the main rate is 25% once profits pass £250,000. Between those two figures marginal relief applies, which produces an effective rate of 26.5% on every extra pound earned in that band — a detail worth knowing, because it means the band between £50,000 and £250,000 is taxed harder at the margin than the headline 25% suggests. Those thresholds are also divided between associated companies, so a second company you control shrinks both.
Then you take money out of what is left, typically as a modest salary plus dividends, and that is taxed again in your own hands. Two layers, two sets of rules. The saving is real for a lot of people, but it is smaller than the pub version of the story, and it shrinks further once you subtract what you now pay an accountant to keep it all straight.
The practical decision rule: incorporating for tax alone rarely justifies itself until profits are comfortably clear of the personal allowance and basic-rate band with room to spare. Below that, you are buying admin.
The admin nobody mentions
This is the part that surprises people, because everyone talks about the tax and nobody talks about the filing. A limited company means annual accounts filed at Companies House, a Corporation Tax return to HMRC, a confirmation statement every year, a separate business bank account that you actually keep separate, and a different mechanism for paying yourself that you cannot improvise.
It also means your accounts are public. Anyone — a competitor, a customer, a nosy neighbour — can look up your filings. Most people never think about this until the first set is filed and it dawns on them that the register is open to everybody.
And the money in the company account is not yours in the way it was as a sole trader. Taking it out because it is sitting there, without recording how, is how directors end up with an overdrawn director's loan account and a tax charge nobody warned them about.
Limited liability, and the personal guarantee that undoes it
The genuine legal benefit is that the company is a separate person. In most ordinary situations the company carries the liability, not you — which matters more than people assume when the work happens in someone else's home or on someone else's site.
But the protection has a large hole in it that is rarely mentioned in the same breath. Banks, equipment finance companies and commercial landlords very often require a personal guarantee from the director before they will lend or let. Sign one and you have contracted out of limited liability for that particular debt. The company can go under and the guarantee still follows you personally. Anyone who incorporates specifically for the protection should read every guarantee they are asked to sign, because a fair number of people discover this only at the worst possible moment.
Incorporating also does not launder away bad workmanship: professional negligence and personal wrongdoing can still reach the individual who did the work.
When it's worth it, and when it isn't
It is usually worth looking at properly when you are turning down work you actually want because of your structure, when profits have been sitting well above what you need to live on for a sustained period, or when the clients you are aiming at screen suppliers before they will quote.
It is usually not worth it when the business is new and small, when income is unpredictable, or when the only argument for it is that it sounds like the grown-up thing to do. Sole trader is genuinely simpler, and simpler has real value when you are the person doing the paperwork on a Sunday night.
VAT is a separate question that often gets tangled up with this one. Registration is compulsory once rolling 12-month turnover passes £90,000, whatever your structure — being a limited company does not trigger it and staying a sole trader does not avoid it. Registering voluntarily before you have to helps if your customers are VAT-registered businesses reclaiming it; it just makes you 20% more expensive if your customers are households.
What to do before you file anything
Get the accountant first, then incorporate. A surprising number of people do it the other way round — set the company up online in twenty minutes, then go looking for someone to explain how to run it — and spend the first several months paying themselves in a way that quietly costs them money.
Before you commit, get your actual profit figure for the last twelve months, ask for the two scenarios side by side in cash terms after all fees, and ask specifically what the ongoing compliance will cost you every year. If the difference does not survive contact with those numbers, stay as you are and revisit it next year. That is a decision, not a failure to act.
Common questions
At what profit does going limited actually start to pay?
There is no single threshold, because it depends on how much you need to draw out to live on. The saving comes from leaving profit in the company or taking it as dividends rather than as trading profit taxed as income, so it only bites once profits comfortably exceed what you actually spend. Below that you are paying accountancy and filing costs for a benefit you cannot reach. The honest test is to take your last twelve months' profit and ask an accountant for both scenarios side by side in cash terms, after all fees. If the gap does not survive that comparison, stay as you are.
Does a limited company protect my personal assets?
Generally yes, with one large exception that catches people out. The company is a separate legal person, so in most ordinary situations it carries its debts rather than you. But banks, equipment finance firms and commercial landlords routinely require a personal guarantee from the director before they will lend or let, and signing one contracts you out of that protection for that specific debt. The company can fail and the guarantee still follows you personally. Incorporating also does not shield you from your own professional negligence. If limited liability is your main reason for incorporating, read every guarantee you are asked to sign.
Do I have to register for VAT if I set up a limited company?
No. Incorporating does not trigger VAT registration, and staying a sole trader does not avoid it. Registration is compulsory once your taxable turnover passes £90,000 in any rolling 12-month period, whatever your legal structure — the two decisions are genuinely separate, even though they get discussed together. Registering voluntarily below the threshold helps if your customers are VAT-registered businesses who reclaim it, because you can then reclaim VAT on your own costs at little real cost to them. It hurts if your customers are households, because it effectively makes you up to 20% more expensive overnight.
How much extra admin does a limited company involve?
Enough that it belongs in the decision rather than in a footnote. You will file annual accounts at Companies House, a Corporation Tax return with HMRC, and a confirmation statement every year. You need a genuinely separate business bank account, and you must pay yourself through a defined route rather than moving money across when you need it — taking cash out informally is how directors end up with an overdrawn loan account and a tax charge nobody warned them about. Your accounts also become public, which surprises people the first time a competitor looks them up. Most owners pay an accountant to handle it, and that fee eats into the saving.
