If you’re running a growing business, you’ll almost certainly hit the “Should I go limited?” question sooner or later. And the honest answer is, sometimes it’s a no-brainer, sometimes it’s a complete faff, and often it depends on your profit level, risk profile, and how you plan to take money out of your organisation.
Below is how I talk clients through it in plain English – the pros, cons, the “thresholds” that matter, the director red tape you’re signing up for, and why the classic salary plus dividends approach has become less appealing for many middle-to-upper earners in recent years.
Sole trader vs limited company: the big difference
I’ve gone into more detail about this here. But if you’re a sole trader, you ARE the business. It’s easier to set yourself up to trade in this way, but you personally carry the risk, and you’re taxed largely through income tax and National Insurance on your profits.
If you register a limited company, the company itself is separate from you, legally. You become a director (and usually a shareholder), and money moves between you and the company via salary, dividends, expenses, pensions, etc. You get limited liability, but you also get more rules.
The upsides of going limited
1. Limited liability (…mostly)
This approach can protect your personal assets in many situations because any debts belong to the company, not you personally. The asterisk here, however, is that liability protection can be weakened by personal guarantees, overdrawn director’s loan accounts, wrongful trading, and not keeping the company properly run.
2. It can make you look more “established”
Some customers, suppliers, and contract opportunities (especially in the B2B space) prefer dealing with limited companies.
3. There are potential tax planning advantages — especially if you don’t need all the profits personally
Companies pay corporation tax on profits, and you pay personal tax based on how you extract money. Since April 2023, Corporation Tax is:
- 19% on profits up to £50,000
- 25% on profits over £250,000
….with marginal relief between those bands.
If you can leave some profit in the company (for working capital, hiring, future investments), a limited company can be useful.
4. It’s easier to bring in shareholders and partners
If you’re planning to grow, sell, or bring in investors, having a company structure already in place can make the process much cleaner.
The downsides (aka the bits that surprise people)
1. There’s more admin to consider
Running a limited company isn’t hard per se, but it’s less forgiving. There are a number of recurring requirements involved, including:
- Sending a copy of your annual accounts to Companies House (the deadline for this is generally 9 months after your firm’s year-end)
- Calculating and paying your corporation tax bill, which is due 9 months and 1 day after your accounting period ends; the CT600 form is due 12 months after the period ends
- Creating and filing a confirmation statement (every year)
- Maintaining statutory registers (including information on Persons of Significant Control)
2. Your details go on public record
The names of your directors, your registered office, your filing history – all of this will be visible on Companies House.
3. Director duties are real
As a director you have legal duties under the Companies Act (for example, the duty to promote the success of the company). In practice, this means keeping proper records, avoiding conflicts, not treating the company bank account like your personal wallet, and acting in the company’s best interests.
4. There’s more scrutiny than ever before
We’re in a period of change. Companies House has begun rolling out identity verification requirements for directors and people with significant control (PSCs), starting 18 November 2025 and phasing in over 12 months. This is part of a broader push to improve accuracy and clamp down on misuse.
When is it a sensible time to consider going limited?
1. Your profits are consistently above what you need to live on
If you’re taking all the profit out to pay personal bills, the tax advantage of having a limited company can shrink, especially now dividend tax has been tightened.
But if you’re regularly generating surplus profit that can be retained in the company, the limited route makes sense.
2. Risks are increasing
Employing staff, signing bigger contracts, taking on leases, professional liability exposure — if any of these things are happening (and happening fast), it’s time to think about ring-fencing risk by separating yourself from your organisation in the eyes of the law.
3. You have registered for VAT (or are about to)
VAT isn’t a reason by itself to incorporate, but it’s often a moment that forces owners to tidy up their systems.
The VAT registration threshold increased from £85,000 to £90,000 from 1 April 2024. Thresholds can change with Budgets, so I always treat “threshold watching” as part of the planning process.
4. When you’re selling B2B services as “you” and IR35 is a factor
For contractors, incorporation used to be the default move. Now, off-payroll working (IR35) and client-led status decisions can make a limited company less valuable in some arrangements. It’s definitely something worth discussing with your accountant if you’re in the contracting world.
Other things to consider
Lots of things will shape your decision to go limited, not least how tax changes and evolving legislation might affect the way you operate and how you can withdraw money from your company.
- Corporation tax bands (small profits and main rate thresholds) are a big planning lever. Viable expenses and careful tax planning can help to keep your corporation tax bill low, but the fact remains that you will need to give a large percentage of your profits over to HMRC.
- Dividend allowances and dividend tax rates recently changed quite substantially in the UK. Tax on dividend income increased by two percentage points in the 2025 Budget, bringing the basic rate to 8.75%, the higher rate to 33.75%, and the additional rate to 39.35%. These rates are destined to go up yet again in the 2026/27 tax year, so be aware of this. The tax-free dividend allowance is also much lower than in previous years; you can currently only take £500 tax-free from your business per annum.
- Income tax bands can make a difference, because freezes on these can create “fiscal drag”, which pulls more people into paying higher tax rates over time. Limited companies usually become more tax-efficient when their profits reach the higher rate income tax threshold, which currently sits at £50,271 – this is the point at which you may want to start taking a small salary and topping it up with dividends, if you’re not already.
- The VAT threshold, because this impacts pricing/admin and sometimes prompts restructuring.
So… is it worth it?
A limited company is often worth it if:
- You’re carrying meaningful commercial risk
- You want to retain profits in the business
- You’re building something you might sell, scale, or bring others into
- Your clients/contracts expect a corporate structure
On the other hand, sticking with your sole trader status is better if:
- Your business is simple, low-risk, and you take most profits for living costs
- You hate admin and want the lightest compliance burden
- You’re early-stage and still testing your business model
Here’s the rule of thumb, from an experienced bookkeeper: incorporate when it supports the way you operate, not just because you hit a turnover milestone. The tax angle still matters, but with dividend changes and rate rises to think about, registering a limited company is now more about your extraction needs and what you think the future holds for your venture.
Still not sure whether now is the right time to set up your limited company? Operating at the other end of the scale, and want to de-register your company and set up as a sole trader instead?
