Sole trader vs limited company

Lesson 10 of 13 in our free Business Money Basics guide: a 5-minute money game with the key points below.

This lesson is in the full version.

Free with a code from your uni, college, council, landlord or employer (worth £600/year). Lesson 1 of Business Money Basics is free for everyone.

Questions you'll answer

Illustration: a small company makes £40,000 of taxable profit in 2026/27. Roughly how much Corporation Tax is due at the 19% small profits rate?

Dex's company owes a supplier money it can't pay. Generally, who is on the hook?

Pays Corporation Tax on its profits → Limited company. 19% up to £50,000 of profit, 25% over £250,000, with marginal relief in between (2026/27).
Business debts are your personal debts → Sole trader. No legal separation: creditors can come after your own money.
Files accounts at Companies House that anyone can read → Limited company. Company accounts are public.
Profit is taxed through your Self Assessment with Income Tax and Class 4 NI → Sole trader. The profit is your income.
The money in the business account belongs to the company, not you → Limited company. You take it out as salary, dividends or a loan, each with rules.
Myth: “A limited company always pays less tax overall than a sole trader.” — It depends on profit, how you pay yourself and costs like accountancy. Get guidance for your own numbers.
Fact: “A private company's annual accounts are usually due at Companies House 9 months after its year end.” — Miss it and there are automatic late-filing penalties.
Fact: “A company director can't just take money out of the company account when they fancy it.” — It's the company's money. Taking it needs to be salary, dividends from profits or a recorded loan.