You started selling online as a sole trader because it was the fastest way to begin. No forms at Companies House, no separate bank account demanded on day one, just you, your products and a marketplace listing. That's the right call for most sellers at the start.
But as your sales climb, the same question keeps coming back: should you stay a sole trader, or is it time to set up a limited company?
This guide answers that for online sellers specifically, whether you're on Amazon, Shopify, eBay, Etsy or your own site. We'll cover what actually changes when you incorporate, run a fully worked tax comparison using current 2025/26 figures, and give you clear decision steps so you can stop guessing.
It's a commercial decision, not just a tax one. Let's break it down.
<h2 id="whats-the-difference">What's the difference between a sole trader and a limited company?</h2>
As a sole trader, you and the business are the same legal person. You keep records, file a Self Assessment tax return, and pay Income Tax and Class 4 National Insurance on your profits. You also have unlimited liability, which means you're personally responsible for the business's debts.
A limited company is a separate legal entity. It owns the business, pays Corporation Tax on its own profits, and files accounts and a confirmation statement at Companies House. You become a director and usually a shareholder. You typically pay yourself a mix of salary and dividends, and your personal liability is generally limited to what you've put into the company.
For an online seller, three practical differences matter most:
- How you're taxed. Sole traders pay Income Tax and NIC on every pound of profit. Companies pay Corporation Tax first, then you pay personal tax only on what you draw out.
- Liability and risk. If a product causes harm or a supplier dispute turns into a debt, a company puts a legal wall between the business and your own home and savings. That wall isn't absolute, but it's real.
- Admin and visibility. A company means more paperwork and public filings. Your accounts and directors are on the Companies House register for anyone to see.
If you sell on a marketplace, you'll find more on structuring an online business on our ecommerce accounting page, and there are platform-specific notes for Amazon FBA sellers and Shopify sellers.
<h2 id="does-it-save-tax">Does incorporating actually save an online seller tax?</h2>
Sometimes, but the saving is smaller than the headlines suggest, and at lower profits it can disappear once you count the costs of running a company.
Here are the 2025/26 figures that drive the comparison.
| What you pay | Sole trader | Limited company |
|---|---|---|
| Tax on profit | Income Tax at 20% / 40% / 45% | Corporation Tax at 19% on profits up to £50,000 |
| National Insurance on profit | Class 4 at 6% then 2% | None on company profit (but employer NIC at 15% on salary above £5,000) |
| Tax when you take money out | None (you're taxed on profit, not drawings) | Dividend tax at 8.75% / 33.75% / 39.35% after a £500 allowance |
Sources for these figures: Income Tax rates and the Personal Allowance (gov.uk), self-employed National Insurance (gov.uk), Corporation Tax (gov.uk), employer National Insurance (gov.uk) and dividend tax (gov.uk).
The 2025/26 Personal Allowance is £12,570, and you keep that whichever structure you use (gov.uk). The key point: a company doesn't make tax vanish. It changes the order in which tax is charged and gives you some control over the timing and the rate.
One number that's narrowed the gap: from 6 April 2025 the employer (secondary) National Insurance rate is 15%, charged on salary above the £5,000 secondary threshold (gov.uk). If you pay yourself a salary, the company picks up that cost. That's why the worked example below shows a modest saving rather than a dramatic one.
<h2 id="worked-example">Illustrative example: £60,000 profit, sole trader vs company</h2>
Illustrative example. Sam runs an online homeware shop. After costs, the business makes £60,000 of profit in 2025/26. Sam has no other income and lives in England. (Scotland sets its own Income Tax rates, so the figures differ there: see gov.uk.)
As a sole trader
| Item | Working | Amount |
|---|---|---|
| Income Tax, basic rate | £37,700 at 20% | £7,540.00 |
| Income Tax, higher rate | £9,730 at 40% | £3,892.00 |
| Class 4 NIC, main rate | £37,700 at 6% | £2,262.00 |
| Class 4 NIC, higher | £9,730 at 2% | £194.60 |
| Total tax and NIC | £13,888.60 | |
| Net in Sam's pocket | £60,000 less £13,888.60 | £46,111.40 |
The Personal Allowance covers the first £12,570, so taxable income is £47,430. The basic-rate band is £37,700, and the rest falls into higher rate (gov.uk). Class 4 NIC runs at 6% between £12,570 and £50,270, then 2% above (gov.uk).
As a limited company (Sam takes a £12,570 salary plus dividends)
| Item | Working | Amount |
|---|---|---|
| Salary | Paid to Sam | £12,570.00 |
| Employer NIC on salary | £7,570 at 15% | £1,135.50 |
| Profit subject to Corporation Tax | £60,000 less salary less employer NIC | £46,294.50 |
| Corporation Tax | £46,294.50 at 19% | £8,795.96 |
| Profit available as dividends | £46,294.50 less £8,795.96 | £37,498.54 |
| Dividend tax | £500 at 0%, £36,998.54 at 8.75% | £3,237.37 |
| Total tax and NIC | £1,135.50 + £8,795.96 + £3,237.37 | £13,168.83 |
| Net in Sam's pocket | salary £12,570 + dividends £37,498.54 less £3,237.37 | £46,831.17 |
Corporation Tax is 19% because the profit is under £50,000 (gov.uk). The £12,570 salary is covered by the Personal Allowance, so there's no Income Tax on it, and it's at the Primary Threshold so there's no employee NIC (gov.uk). The dividends sit within the basic-rate band, so they're taxed at 8.75% after the £500 dividend allowance (gov.uk).
The result. The company route leaves Sam roughly £720 better off (£46,831.17 versus £46,111.40) before counting the cost of running a company. Annual accounts, a confirmation statement, payroll and the extra bookkeeping often cost more than that in fees and time. At £60,000 the case is finely balanced. As profits rise well above this, and especially if you can leave some money in the company rather than drawing it all, the advantage usually grows.
You can sketch your own sole trader position with our self-employed tax calculator before you decide.
<h2 id="what-else-changes">What else changes when you become a limited company?</h2>
Tax is only part of it. For an online seller, these often matter just as much.
Your liability and your risk
Selling physical products carries real risk: a faulty item, a safety recall, a supplier who doesn't deliver after you've paid. A company limits your personal exposure, which is reassuring once stock orders and supplier credit get large.
Your admin load goes up
You'll file annual accounts and a Corporation Tax return, submit a confirmation statement, and run payroll if you take a salary. Your company details sit on the public register at Companies House. It's manageable, but it's more than a single Self Assessment return. Our Corporation Tax service and company secretarial service exist precisely to take this off your plate.
Marketplace and banking practicalities
Some suppliers and wholesalers prefer dealing with a registered company, and a company can look more established to customers. You'll need a separate business bank account, and you'll have to update your selling accounts and VAT registration (if you're registered) to reflect the new legal entity. You can't simply carry your sole trader VAT registration across; the company is a new taxpayer.
VAT doesn't change the structure decision
The VAT registration threshold is £90,000 of taxable turnover, and it applies whether you're a sole trader or a company (gov.uk). Incorporating doesn't reset the clock in a way that avoids VAT, so don't treat company formation as a VAT-planning tool. More on the wider picture for incorporated sellers on our limited companies page.
<h2 id="mtd">Does Making Tax Digital change the decision?</h2>
It's worth knowing about, but it shouldn't be the deciding factor on its own.
Making Tax Digital for Income Tax starts on 6 April 2026 for sole traders and landlords with qualifying income over £50,000, based on the 2024/25 tax year. The threshold drops to £30,000 from 6 April 2027 and to £20,000 from 6 April 2028 (gov.uk).
In practice that means quarterly digital updates to HMRC instead of one annual return. Limited companies aren't in MTD for Income Tax, because they pay Corporation Tax instead. So a high-earning sole trader will face the new quarterly rhythm, while a company won't.
That's a genuine difference, but it's an admin change, not a tax saving. We'd never recommend incorporating purely to sidestep MTD: the costs and obligations of a company usually outweigh the convenience. Decide on the fundamentals first.
<h2 id="decision-checklist">When does it make sense to incorporate? A decision checklist</h2>
There's no single magic profit figure, but these are the signals we look at with online sellers.
Leaning towards staying a sole trader if:
- Your profits are modest and you draw most of what you earn.
- You value simplicity and want one tax return, not a company's filing cycle.
- The business is new and your numbers are still volatile.
Leaning towards a limited company if:
- Your profits are consistently into the higher-rate territory and you can leave some money in the business.
- You're carrying real product or supplier risk and want limited liability.
- You want the credibility of a registered company with suppliers and customers.
- You're thinking about bringing in a co-owner, raising finance, or eventually selling the business.
A useful rule of thumb: once profits are comfortably and reliably above the higher-rate threshold of £50,271 (gov.uk), and the non-tax reasons stack up too, incorporation is usually worth a proper look. Below that, the admin often cancels out the saving.
The honest answer is that it's a judgement call about your specific numbers and plans, not a formula. That's exactly the kind of thing we model with sellers before they commit.
Not sure which side of the line you're on? Book a free 20-minute call with a Zmartly accountant. We'll run your real ecommerce numbers both ways and tell you straight whether incorporating is worth it. Talk to a Zmartly accountant.
<h2 id="faqs">Frequently asked questions</h2>
Do I have to be a limited company to sell on Amazon, Shopify or eBay?
No. Online marketplaces let you sell as a sole trader or as a limited company. The platform doesn't dictate your legal structure; that's your choice based on tax, risk and your plans for the business.
At what profit should an online seller incorporate?
There's no fixed figure. Below the higher-rate threshold of £50,271 for 2025/26 (gov.uk), the tax saving from a company is often small and can be wiped out by the extra running costs. Above it, and especially if you can leave profit in the company, the case usually strengthens. Always model your own numbers.
Does a limited company pay less tax than a sole trader?
Not automatically. A company pays Corporation Tax at 19% on profits up to £50,000 (gov.uk), and you then pay dividend tax when you draw money out (gov.uk). With employer National Insurance at 15% on salary from April 2025 (gov.uk), the saving at moderate profits is modest, as our worked example shows.
Can I move my sole trader VAT registration to my new company?
No. The company is a separate legal entity, so it needs its own VAT registration if it meets or expects to exceed the £90,000 threshold (gov.uk). You can't simply transfer your sole trader registration across, though there are reliefs and procedures your accountant can handle when you transfer the business.
Will I have to follow Making Tax Digital either way?
Making Tax Digital for Income Tax applies to sole traders and landlords, starting 6 April 2026 for those with qualifying income over £50,000, then lower thresholds in 2027 and 2028 (gov.uk). Limited companies are outside MTD for Income Tax because they pay Corporation Tax instead.
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