This guide covers ltd vs sole trader: decision guide for UK freelancers for UK freelancers and small businesses in 2025/26.
A UK limited company is a separate legal entity from you personally. Trading through one changes how you're paid, how you're taxed, what you have to file, and who you're accountable to.
The mechanics of running a limited company aren't difficult once you understand the shape of the year — but each moving part has its own deadlines and its own penalty regime. Getting them wrong is expensive.
Key facts
- A UK limited company must file annual accounts at Companies House and a Corporation Tax return with HMRC — separate filings, separate deadlines.
- The corporation tax main rate is 25% (profits over £250,000); the small profits rate is 19% (profits under £50,000); marginal relief tapers the rate in between.
- Directors are officers of the company with legal duties under the Companies Act 2006 — including keeping proper accounting records and acting in the company's best interests.
- You cannot simply 'take money' from a limited company. Every extraction has to be classified as salary, dividend, expense reimbursement or director's loan — each with its own tax treatment.
- The company year end (accounting reference date) defaults to the anniversary of the month you incorporated; you can change it once every five years subject to some conditions.
- Confirmation statements are separate from annual accounts. They confirm the company's public register data at Companies House and are due once a year.
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Setup and structure
Incorporating a company at Companies House takes about 24 hours online and costs a small fee. What takes longer is the surrounding decisions: share structure, directors, registered office, PSC (person of significant control) declarations.
Standard freelance setups have one director who is also the 100% shareholder. This is straightforward — but not always optimal. If a spouse is genuinely involved in the business, shared shareholding can spread dividends across two personal allowances.
You'll also need to decide the accounting reference date (year end), whether to VAT-register, and which accounting software you'll use from day one. Setting these up in the first month is dramatically easier than switching later.
Ongoing obligations
Every year, a UK limited company must file annual accounts at Companies House and a Corporation Tax return (CT600) with HMRC. Miss either and penalties escalate quickly.
The confirmation statement — a snapshot of the company's public register data — is separate and due once a year. Missing it can result in the company being struck off.
PAYE and payroll are required if the company pays any salaries — including to the director. Most limited-company freelancers pay themselves a small salary (up to the NI threshold) plus dividends.
Extracting money efficiently
Directors can extract company profit through salary, dividends, expense reimbursements, pension contributions, or director's loans. Each has different tax treatment.
The classic freelance limited-company pattern is a small salary up to the NI Secondary Threshold (£9,100/year in 2025/26) plus dividends up to the basic-rate band. This minimises the combined tax and NI bill for modest profits.
Higher earnings tilt the maths toward pension contributions or retaining profit inside the company (paying corporation tax now but deferring personal tax). Personal circumstances matter a lot here.
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Related: PayslipCheck
If you're paying yourself a director's salary, our sister site PayslipCheck helps directors sanity-check the payslips coming out of their payroll software.
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Run your own numbers with our Sole Trader vs Ltd Calculator. It's free, mobile-friendly, and updated for the 2025/26 tax year — no signup required.
No. You do not need to be UK resident to be a director or shareholder of a UK limited company. You do need a UK registered office address and a UK bank account can be harder to open as a non-resident.
The Companies House incorporation fee is a small fixed cost (currently £50 for online incorporation). Formation agents charge from around £15 upwards for extra services (registered office, mail forwarding). Ongoing accounting typically costs £60-£150/month for freelance limited companies.
Yes. A UK limited company can have a single director who is also the sole shareholder. This is the most common freelance setup.
The director runs the company day-to-day and has legal duties under the Companies Act. The shareholder owns the company. Often the same person, but not always — e.g. a family member could own shares without being a director.
Legally, no. Practically, almost always yes — the filings, deadlines and tax rules are enough that most limited-company freelancers find the accountant fee saves more than it costs.
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This guide is general information based on UK rules for the 2025/26 tax year. It is not personal tax or legal advice. For decisions affecting your tax position or legal exposure, consult a qualified accountant or solicitor.