Choosing whether to trade as a sole trader or form a limited company is one of the most important decisions for your business. This choice affects your tax liability, paperwork burden, protection from business debts, and even how you’re viewed by clients and lenders.
At Modus Accountants, we regularly guide Oxfordshire business owners through this decision. Here’s a clear, up-to-date guide to help you choose with confidence.
1. What Is a Sole Trader?
A sole trader operates as an individual, legally, that’s you and the business.
In 2025, key considerations include:
- Taxation: Profit taxed via self-assessment; higher earners pay 40–45%.
- Administration: Simple, just file annual accounts and a tax return.
- Liability: You’re personally responsible for any debts.
Best for: Small scale traders, consultants, or anyone wanting minimal admin.
2. What Is a Limited Company?
A limited company is a separate legal entity, offering added protection and flexibility.
In 2025, the main benefits are:
- Tax: Profits taxed at 25% Corporation Tax often lower than personal rates.
- Flexibility: Income can be optimised using a mix of salary and dividends.
- Credibility: Often seen as more professional by clients and creditors.
- Admin: Requires more work, annual accounts, company tax returns, Companies House filings.
Best for: Businesses with growth ambition or owners planning for future exit strategies.
3. Tax Comparison Example (2025/26)
Let’s say your business makes £60,000 profit:
- Sole Trader:
- Tax & NI £15,000+, leading to a take-home income of around £45,000.
- Limited Company:
- Corporation Tax (25%) = £15,000
- Through structured salary and dividends, your take-home could be £47,000+.
Key insight: Higher-earning businesses often benefit more from incorporation.
4. Risk & Liability
| Structure | Personal Liability |
|---|---|
| Sole Trader | Yes — unlimited liability |
| Limited Company | No — protection applies |
A limited company safeguards your personal assets—particularly valuable as your business grows.
5. Other Important Factors in 2025
- Making Tax Digital (MTD): Digital records are mandatory.
- Pensions: Directors can make tax-efficient employer contributions.
- Exit Planning: Company shares can be sold, gifted, or inherited with flexibility.
How to Decide
Consider the following when evaluating your structure:
- Current and projected profits
- Intent to reinvest or withdraw profits
- Willingness to handle extra admin
- Long-term goals — sale, growth, legacy-building
Need Assistance?
At Modus Accountants, we help Oxfordshire-based sole traders and business owners make informed decisions—simply, clearly, and with local expertise.
Call 01993 225030 or email hello@modus-accountants.co.uk for your free consultation.