Sole Trader or Limited Company in 2026

Choosing the right business structure is one of the most important decisions a founder can make. As we move into 2026, the question remains as relevant as ever: should you operate as a sole trader or form a limited company?

Your answer will depend on your income expectations, risk tolerance, growth plans, and how much administration you’re willing to take on.

In this guide, we walk through the key differences, including the impact of Making Tax Digital (MTD) and help you decide which structure best supports your business goals.

Advantages

• Easy to set up — minimal cost and no Companies House registration
• Less administration — no statutory accounts or confirmation statements
• Straightforward tax — profits taxed through Self Assessment
• Full control — you make all decisions and retain all profits after tax

Tax & MTD in 2026

From 6 April 2026, some sole traders will be required to use Making Tax Digital for Income Tax (MTD ITSA). This means you must use HMRC-recognised digital software to keep records and submit quarterly updates instead of only an annual tax return. 

MTD: Phased Roadmap for Sole Traders

• 6 April 2026 – Sole traders and landlords with qualifying income over £50,000 must use MTD for Income Tax.
• 6 April 2027 – Threshold reduces to £30,000. 
• 6 April 2028 – Threshold reduces to £20,000 (subject to final legislation).

Under MTD, you’ll still prepare a year-end submission, but you’ll also send four quarterly digital updates and a final declaration each year.

👉 official HMRC guidance on MTD click here

Things to Watch

• Unlimited personal liability – if the business has debts, your personal assets (home, savings, etc.) are at risk, since there’s no legal distinction between you and your business.
• Tax inefficiency as profits grow – higher earnings can push you into higher tax bands with less flexibility.

MTD compliance – quarterly submissions require reliable digital systems and can increase admin if not prepared.

Advantages

• Limited liability – the company is a separate legal entity. Owners (shareholders) are generally not personally responsible for business debts beyond their investment, helping protect personal assets.
• Tax planning opportunities – you can optimise how you take income via salary and dividends.
• Professional image – many clients and larger organisations prefer to work with limited companies.
• Scalability – easier to bring in investors, take on staff, and expand.

Tax & Compliance

Limited companies pay Corporation Tax on profits, and directors pay personal tax on salaries and dividends. Although compliance (accounts, Corporation Tax returns, confirmation statements) is greater, the structure can be more tax-efficient once profits grow.

Director Responsibilities

Directors of a limited company have legal duties under the Companies Act, including:

• Filing annual accounts and Confirmation Statements with Companies House
• Maintaining accurate records and meeting tax filing deadlines
• Acting in the company’s best interests and avoiding conflicts of interest
• Ensuring statutory obligations (PAYE, VAT, pension duties) are met

Failing to meet these responsibilities can result in penalties or personal liability in some cases.

Official guidance on director responsibilities can be found on the UK government’s website: click here 

Many founders start as sole traders to keep things simple, then incorporate when profits rise, risks increase, or they seek investment. Typical trigger points include:

• Profits exceeding basic rate tax bands
• Desire to retain earnings in the business
• Increasing risk or contracting requirements

Need for a more formal structure

Deciding between a sole trader and a limited company is more than a tax choice, it’s a strategic decision that can affect your risk profile and future growth.

As limited company specialists, we support founders at every stage:

• Business structure reviews with personalised recommendations
• MTD planning and setup — ensuring compliance and peace of mind
• Director and statutory compliance management
• Tax planning and optimisation year-round

👉 Ready to make the right choice for your business in 2026?

Book a no obligation 30min discovery call with me today and let me help you set up the right structure for growth and success.