Sole trader or limited company? A UK freelancer's guide for 2026

Most UK freelancers should be sole traders, and should stay sole traders for longer than the internet suggests. The limited company advice you will find is mostly written for people earning well into six figures, or by companies that sell company formations. April 2026 moved the point at which incorporating starts to pay, and it moved it in the direction those guides have not caught up with.

You are probably already a sole trader

There is no form to fill in to become a sole trader. If you invoice people for your own work and you have not set up a company, that is what you are. gov.uk puts the registration duty at £1,000 of gross self-employed income in a tax year: below that the trading allowance normally covers you, above it you tell HMRC and file a Self Assessment return.

The thing that makes a sole trader different is not tax. It is that you and the business are the same legal person. Your business owns nothing separately from you, and it owes nothing separately from you. That matters later.

A limited company is the opposite arrangement. It is its own legal person with its own bank account, its own tax, and its own name on the contract. You own it and you run it, but you are not it. Companies House registers one online for £100, usually inside 24 hours.

The tax difference, without the spreadsheet

As a sole trader, your profit is your income. You pay income tax on it at the normal rates, 20% to £50,270 and 40% above that, with the first £12,570 covered by the personal allowance. On top you pay Class 4 National Insurance, 6% on profits between £12,570 and £50,270 and 2% on anything over. Every figure is on gov.uk and HMRC works the whole lot out from one return.

A company splits the same money into two taxes. The company pays corporation tax on its profit first, at 19% while profits stay at or below £50,000. Then you take money out, usually as a small salary plus dividends, and pay personal tax on the dividends.

That second step is where the old advice has stopped being true.

What April 2026 changed

Dividend tax went up. From 6 April 2026 the ordinary rate is 10.75%, up from 8.75%, and the upper rate is 35.75%, up from 33.75%. The additional rate stayed at 39.35% and the dividend allowance stayed at £500. The rates are set out in the Budget 2025 rates annex and on gov.uk.

Two points does not sound like much. On the amount a mid-range freelance company actually distributes it is a few hundred pounds a year, taken straight off the gap that made incorporating worth the admin in the first place. Any guide written before spring 2026 is quoting 8.75% at you and reaching a more flattering conclusion than the current rates support.

The other change runs the other way. Making Tax Digital for Income Tax started on 6 April 2026 for sole traders and landlords with qualifying income over £50,000, and it means digital records plus a quarterly update to HMRC instead of one annual return. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028, so it reaches most working freelancers within two years. HMRC's MTD guidance has the timetable.

MTD for Income Tax does not apply to limited companies. Not because companies get an easier ride, they file annual accounts and a corporation tax return instead, but because it is a different regime. If quarterly filing is the thing you are dreading, incorporating moves the work rather than removing it.

The reasons that have nothing to do with tax

These decide it more often than the arithmetic does.

• Liability. A sole trader's debts are personal debts. If a piece of work goes badly wrong and insurance does not cover it, there is no line between the business and your savings. A company is the line. It is not absolute. Directors have duties, and a personal guarantee on a loan cuts straight through it. For most freelance risk it is still real protection.
• Clients who will not contract with an individual. Plenty of large organisations, agencies and public bodies have procurement rules that require a limited company, or insist on a level of professional indemnity cover they will only accept from one. It is a common reason a freelancer incorporates in a hurry, and it arrives as a deadline rather than a choice.
• Everything is public. A company puts your name, your registered office and a version of your accounts on a public register that anyone can search. Some freelancers mind that a great deal. A registered office service solves the address part for a fee.
• Getting out is harder than getting in. Closing a company is a process with its own filings and its own costs. Stopping as a sole trader is a box on a tax return.

What a company costs you in practice

The £100 is the cheap part. A company brings annual accounts, a corporation tax return, a confirmation statement, a separate business bank account, and in almost every case an accountant, because doing all of that yourself is a genuine second job.

There is also a newer obligation worth knowing before you file. Identity verification at Companies House became a legal requirement on 18 November 2025. New directors and people with significant control verify as part of setting the company up, and existing ones confirm it alongside their next confirmation statement during a twelve month transition that runs out this autumn. Verifying is free through GOV.UK One Login and you do it once, then reuse the personal code it gives you. The detail is on gov.uk.

If you do switch, switch at a clean point

You do not have to decide this now and you are not stuck with the answer. Freelancers move from sole trader to company all the time, and the usual trigger is profit settling comfortably above the higher rate threshold, or a client who requires it.

Do it at the start of a tax year or the start of a big contract, not in the middle of a project. Mid-project you end up with half the work invoiced by you and half by a company that did not exist when the contract was signed, which is a mess for the client's accounts payable and for your own records. Tell your existing clients before the first invoice arrives with a different name and a different bank account on it, because that is exactly what an invoice fraud attempt looks like from their side.

Run the numbers on your own profit before you move, ideally with an accountant, once. It is a cheap hour against a structure you will keep for years.

The bottom line

Sole trader until the numbers or a client say otherwise. The tax advantage of a company is real but narrower than it was in April 2026, and it arrives well above the point most freelancers are at. When a company does make sense you will usually know why without doing any sums, because a client will have told you, or because the work has reached a size where carrying it personally has stopped feeling sensible.