When changing from working as a Sole Trader to running a Limited Company, you'll need to consider how your business might change and what you'll need to be aware of. If you're not sure what business structure is right for you, we've written an article to help.

If you think you're ready to make the change, here's a simple explanation of when to make the transition and what to keep in mind, without all the jargon.

When is the right time to form a Limited Company?

People often start out as a Freelancer/ Sole Trader due to the ease of the set-up and lower administrative burden. But after increasing their earnings, many consider setting up a Limited Company.

The common rule is that when your earnings remain low, it may be best to remain as a Sole Trader, unless you need other benefits such as limited liability. As a Sole Trader, your tax and accounting responsibilities will be relatively simple.

When your earnings start to pick up, it can become more tax-efficient to move to a limited company structure. Recent changes to tax, including new Corporation Tax rates and a reduction in the main rate of Class 4 National Insurance for the self-employed, have shifted the goalposts.

While every situation is unique, recent accountant analyses for the 2024/25 tax year suggest that incorporation becomes more tax-efficient once annual profits reach the approximate range of £35,000–£60,000. The exact amount depends on your specific circumstances, including how you plan to take money out of the business and your accountancy costs. Our Take-Home Pay Calculator can show you how this might look for you.

What are the benefits of setting up a Limited Company?

Our article about Sole Trader vs Limited Company vs umbrella goes into all the details, but the key advantages revolve around financial protection, tax planning, and money-saving. It's also worth reading our guide to the pros and cons of a Limited Company structure.

One of the biggest benefits of running a Limited Company is that it is a separate legal entity. This means you won't be personally responsible if your company makes any losses or has a claim made against it. This protection is known as 'limited liability'. Our article “Am I liable for debts in my Limited Company” covers this topic in more detail. 

Because the business is separate from you, all of its finances must be kept separate too. You must set up a separate business bank account in the name of your Limited Company. You can't use the personal bank account you may have used as a Sole Trader, as this could lead to nasty tax consequences.

Your personal income is also processed differently. It will typically be paid to you as a combination of a director's salary and dividends. Dividends are taken from the company's profits after it has paid Corporation Tax. See our article on how much salary you should take from your Limited Company.

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Understanding your new tax obligations

As a Sole Trader, you pay Income Tax and self-employed National Insurance on your business profits through your annual Self Assessment.

When you run a Limited Company, the business itself pays Corporation Tax on its profits. For the 2024/25 financial year, the main rate of Corporation Tax is 25%, but a small profits rate of 19% applies to companies with profits of £50,000 or less. If your company's profits fall between £50,000 and £250,000, you will get Marginal Relief, which provides a gradual increase in the effective tax rate.

As a director, you'll still need to file an annual Self Assessment tax return to declare the salary and dividends you receive from your company, and you'll pay personal tax on this income. However, with careful planning, this structure often allows you to be more tax-efficient overall. You can explore your responsibilities as a company director and learn more about small business taxes in our detailed guides.

What is IR35 and how will it affect me?

IR35 (also known as the off-payroll working rules) is tax legislation designed to combat tax avoidance by workers who supply their services to clients via an intermediary, like a Limited Company, but who would be an employee if the intermediary was not used. Such workers are called 'disguised employees' by His Majesty's Revenue and Customs (HMRC).

The reason this legislation exists is that HMRC is concerned that some businesses are using their limited companies solely to pay less tax.

You'll need to know whether any contract you take on as a Limited Company is subject to IR35 rules or not. HMRC are strict on this and can impose taxes and penalties if you get it wrong.

If you’re struggling to figure out who determines your IR35 status, you aren’t alone. Our latest guide on “IR35 changes in 2025” is a great place to start to learn about the latest off-payroll working rules.

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FAQs about changing from a sole trader to a limited company

Who should be a director?

Usually, if you’re setting up a limited company for your business then you’ll also be a director. It’s not too difficult, but there are things you’ll need to be aware of as a director. But what about if you’re working with a business partner, or you want your spouse or partner to be a director and shareholder? 

These can be difficult decisions with potentially costly implications if you get them wrong, so we’d recommend getting some professional advice from a reputable online accountant like Crunch. All of our paid accounting plans come with unlimited access to accounting experts and qualified accountants to make sure all your questions are answered.

Interested? Book a free consultation with our team to see how we could help you!

How to make the switch: A practical checklist

Making the move from Sole Trader to Limited Company involves a few key administrative steps.

• Who should be a director? Usually, you'll be the director of your own limited company. But if you're working with a business partner, or want your spouse to be a director and shareholder, these decisions can have significant implications. It's wise to get professional advice to ensure you set things up correctly from the start.
• How do I transfer my assets? If you bought any business assets like a computer or van while you were a Sole Trader, you can transfer them to your new limited company. However, there can be tax implications, so it's vital you speak with an accountant for bespoke advice.
• What do I need to tell HMRC? You must notify HMRC that you are no longer working as a Sole Trader and that you are now a director of a Limited Company. This is crucial as your tax obligations will change. We can handle setting up your company and registering you for the correct taxes if you become a Crunch client, or you can use our standalone Crunch formations service.

The role of modern accounting and technology

One of the aspects of a Limited Company that traditionally puts people off is the perceived administrative hassle. However, with advances in technology, this is no longer the case.

HMRC's Making Tax Digital (MTD) initiative is driving this change. MTD is already mandatory for all VAT-registered businesses, requiring them to keep digital records and file returns using compatible software. MTD for Income Tax Self Assessment (ITSA) is being phased in from April 2026 for Sole Traders and Landlords, starting with those whose income exceeds £50,000. 

Many in the accounting industry have embraced this digital shift already, including Crunch. We’ve already invested millions into our software to make it easier than ever for business owners to manage their accounts. Including harnessing the power of Artificial Intelligence (AI) to make everyday accounting tasks effortless—from setting up recurrent invoices and real-time tax calculations to seamless expense management—so running your Limited Company takes less time and feels far less stressful.

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Choosing the right accountancy support for your company

What this all emphasises is the key role that your accountant plays. The ideal model to support your Limited Company is an all-in-one accounting solution that combines smart online software with unlimited access to expert accountants when you need them.