You've been running well as a sole trader, the profit's climbing, and someone's told you that "going limited" would save you tax. They're often right. But the switch is more than just registering a company name, and doing it in the wrong order is how a clean set of books turns into a year of cleanup.
This guide walks you through the whole move: when it's worth it, the exact steps in the right sequence, what happens to your VAT number and your bank account, and the tax reliefs that stop you being taxed twice on the way in. We've written it for the busy sole trader who wants the real-world checklist, not theory.
It's aimed at UK sole traders in England, Wales and Northern Ireland. Scotland sets its own Income Tax rates and bands, so if you're a Scottish taxpayer the personal-tax figures below will differ.
Is it worth switching from sole trader to limited company? {#worth-it}
There's no magic profit figure that flips the answer, but the tax case usually starts to stack up once your profits comfortably clear the higher-rate threshold and you don't need to draw every penny out.
As a sole trader you pay Income Tax and Class 4 National Insurance on all your profit, whether you spend it or leave it in the business. For 2025/26 the higher rate of 40% kicks in once your total income passes £50,271, and Class 4 NIC runs at 6% on profits between £12,570 and £50,270, then 2% above that.
A limited company is taxed differently. The company pays Corporation Tax on its profit (19% on profits up to £50,000 for the financial year starting April 2025), and you then decide how much to take out as salary and dividends. Money you leave in the company isn't taxed on you personally until you draw it. That flexibility, plus the gap between dividend tax rates and Income Tax plus NIC, is where the saving comes from.
It isn't only about tax. A limited company gives you limited liability, a separate legal identity that some clients prefer to contract with, and a cleaner structure if you ever want to bring in a co-owner or sell. The trade-offs are more admin, public filings at Companies House, and a director's legal duties.
If you're weighing the structures in detail, our guide on choosing between sole trader and limited company goes deeper on the non-tax factors. This post assumes you've decided to switch and want to do it cleanly.
Illustrative example: the tax on the same profit, both ways {#worked-example}
Illustrative example. Take Marcus, a sole-trader design consultant in Leeds with £60,000 of profit in 2025/26. He doesn't need all of it to live on. Here's roughly how the tax compares if he stays a sole trader versus incorporating and paying himself a £12,570 salary plus dividends. Figures are rounded and use 2025/26 rates.
| Sole trader (£60,000 profit) | Amount |
|---|---|
| Income Tax | £11,432 |
| Class 4 National Insurance | £2,457 |
| Total tax and NIC | £13,889 |
| Take-home | £46,111 |
| Limited company (£60,000 profit) | Amount |
|---|---|
| Employer's NIC on £12,570 salary | £1,136 |
| Corporation Tax at 19% | £8,796 |
| Dividend tax | £3,237 |
| Total tax and NIC | £13,169 |
| Take-home | £46,831 |
On these numbers Marcus keeps around £720 more by incorporating. That's a real saving, but notice it isn't enormous at this profit level, and it assumes he takes the lot out in the same year. The gap usually widens as profits rise or if he leaves money in the company.
How the company side works: the £12,570 salary uses up his personal allowance and sits at the National Insurance primary threshold, so there's no Income Tax or employee NIC on it, though the company pays employer's NIC at 15% on the part above the £5,000 secondary threshold. The salary and that employer's NIC are deductible, so Corporation Tax is charged on the remaining profit. What's left after Corporation Tax is paid out as dividends, taxed at 8.75% in the basic-rate band after the £500 dividend allowance.
Your own numbers will differ. Try our income tax calculator and dividend tax calculator to model your situation, or get a tailored comparison from us before you commit.
What are the steps to change from sole trader to limited company? {#steps}
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The order matters. Here's the sequence we use with clients so nothing falls between the cracks.
| Step | What you do | Why it's in this order |
|---|---|---|
| 1. Form the company | Register with Companies House (£100 online, usually within 24 hours). You'll need a name, a director, at least one shareholder, a SIC code, a registered office and identity verification. | You can't open a company bank account or transfer the trade until the company legally exists. |
| 2. Register for Corporation Tax | This usually happens automatically when you incorporate; you'll get a company UTR. | The company is a separate taxpayer from day one. |
| 3. Open a company bank account | A separate account in the company's name. | A limited company's money is not your money. Mixing funds is the single biggest cause of messy first-year accounts. |
| 4. Decide the transfer date and move the trade | Pick a clean changeover date, then transfer the business, contracts and assets to the company. | A tidy cut-off date keeps your final sole-trader accounts and your first company accounts separate. |
| 5. Sort VAT and PAYE | Decide whether to transfer your VAT number, and set up PAYE if you'll run a salary. | These follow the legal entity, so they need re-pointing at the company. |
| 6. Tell HMRC you've stopped as a sole trader | Notify HMRC and file a final Self Assessment return for the part-year you traded. | This closes off your self-employment cleanly and avoids late-filing problems. |
| 7. Update everyone else | Clients, suppliers, insurers, your website and invoices, plus your professional bodies. | Invoices in the wrong name can delay payment and muddy who the contract is with. |
You'll notice forming the company comes first and telling HMRC you've stopped trading comes last. That's deliberate: you want the new structure fully live before you switch off the old one.
For the mechanics of step one, our walkthrough on how to set up a limited company covers the Companies House registration in detail. If you'd rather we handle the formation and the filings, that's part of our company secretarial service.
What happens to my VAT registration when I incorporate? {#vat}
This trips a lot of people up, because a limited company is a brand-new legal entity. Your VAT registration belonged to you as a sole trader, so by default it doesn't follow automatically.
You've got two routes:
Transfer the existing number. If you want the company to keep your VAT number, you and the company can apply to transfer it using form VAT68. Both parties complete the form, and the company also registers for VAT in the normal way. This keeps continuity for customers and suppliers.
Cancel and re-register. Alternatively, you deregister as a sole trader (the reason is a change of legal entity) and the company registers fresh. Worth knowing: the company's turnover count for the £90,000 VAT registration threshold starts from zero, so if you were close to the threshold as a sole trader you don't carry that history over unless you transfer the number.
Either way, tell HMRC promptly. If you keep trading without re-pointing your VAT correctly you can end up charging VAT under the wrong entity, which is awkward to unwind. We sort the VAT side as standard when we handle an incorporation.
Do I need a new business bank account? {#bank}
Yes. A limited company is legally separate from you, so its income and costs have to run through an account in the company's name, not your personal or sole-trader account.
In practice this is where good intentions go wrong. People form the company, then keep banking client payments into the old account "just until things settle". Don't. From your changeover date, money the company earns belongs to the company, and routing it through a personal account creates a tangle of director's loan entries that your accountant then has to untangle at year end.
Open the company account early, point your invoices at it from the transfer date, and keep the old sole-trader account open only long enough to clear anything still in flight.
Will I be taxed when I transfer my business into the company? {#incorporation-relief}
Possibly, but there's a relief designed for exactly this moment.
When you move your business into a company, you're disposing of business assets, and that can create a capital gain, most often on goodwill (the value of the business itself). Left alone, that could mean a Capital Gains Tax bill just for changing structure.
Incorporation Relief can defer that gain. It applies automatically if you transfer the business and all its assets (apart from cash) to the company as a going concern, in exchange for shares. Rather than paying tax now, the gain is rolled into the cost of your shares, so you don't pay until you eventually sell those shares. HMRC's own example: if you're given shares worth £100,000 for a business with a £60,000 gain, your base cost in the shares becomes £40,000, deferring the £60,000.
If you take part of the value as cash instead of shares, the relief only covers the share portion. And because the relief is automatic, you'd have to actively elect out if for some reason that suited you better.
The mechanics here are genuinely fiddly, and getting the asset values and the paperwork right matters. This is the part of the switch we'd most strongly suggest you don't freelance. Our tax advisory team handles the incorporation gain and the elections as part of moving you across.
What changes about how I get paid and what I file? {#after}
The day-to-day rhythm changes more than people expect.
As a sole trader you took drawings whenever you liked and squared it all up through one Self Assessment return. As a company director you'll typically pay yourself a modest salary through PAYE and top up with dividends, which means running payroll (even if it's just you) and keeping proper dividend paperwork.
Your filing obligations grow too. The company files annual accounts and a Corporation Tax return, plus a confirmation statement to Companies House, on top of your personal Self Assessment for the salary and dividends you draw. The deadlines don't line up with the old Self Assessment calendar, so it's worth mapping them out.
Get the dividend process right from the start. There are rules about only paying dividends out of distributable profit and documenting each one, and our guide to paying dividends from a limited company covers the board minutes and vouchers you'll need. The Corporation Tax side, including the 19% small-profits rate and marginal relief once profits pass £50,000, is something we manage through our Corporation Tax service.
Common mistakes when switching, and how to avoid them {#mistakes}
- Banking company money personally. As above, the number one cause of a messy first year. Open the company account and use it from day one.
- Forgetting the VAT change. Assuming the VAT number just carries over, or not deciding between transfer and re-register, leads to invoices under the wrong entity.
- Not filing the final sole-trader return. You still owe a Self Assessment for the part of the year you traded as a sole trader. Tell HMRC you've stopped and file it.
- Switching mid-year without thinking it through. A mid-year change means two short sets of accounts and overlapping admin. It's doable, but a clean changeover date saves real hassle.
- Overlooking employees. If you have staff, moving them to the new company can trigger TUPE obligations, including consulting affected employees. Plan this before the transfer, not after.
- Ignoring the incorporation gain. Goodwill can carry a capital gain. Don't assume there's nothing to report; check whether Incorporation Relief applies.
Ready to make the switch the easy way?
You don't have to project-manage all of this yourself. At Zmartly we handle the whole move end to end: forming the company, transferring the trade with the right reliefs, sorting your VAT and PAYE, and closing off your sole-trader year cleanly. Book a free 20-minute call with a Zmartly accountant and we'll map out your switch and the tax you'll save. Talk to a Zmartly accountant.
FAQs {#faqs}
Can I keep my sole trader VAT number when I go limited?
Yes. You and your new company can apply to transfer the existing VAT registration number using form VAT68, so customers and suppliers see no change. Alternatively you can deregister as a sole trader and have the company register fresh, but then the company's turnover count towards the £90,000 threshold starts from zero.
Do I have to tell HMRC I've stopped being a sole trader?
Yes. When you stop trading as a sole trader you must tell HMRC and file a final Self Assessment tax return covering the part of the tax year you traded. Doing this closes off your self-employment cleanly and avoids late-filing issues.
Will I pay Capital Gains Tax when I transfer my business to a company?
You might, because transferring business assets such as goodwill can create a gain. Incorporation Relief usually defers that gain automatically if you transfer the whole business and all its assets except cash in exchange for shares. The gain is rolled into the cost of your shares rather than taxed at the point of transfer.
How much does it cost to set up the limited company?
Registering a company online with Companies House costs £100 and is usually completed within 24 hours. That's the formation fee only; accountancy, VAT and transfer work are separate, but a clean setup saves far more than it costs in avoided mistakes.
Is going limited always more tax-efficient?
No. The saving depends on your profit level and how much you need to draw out. At lower profits, or if you take every penny as income each year, the difference can be small. The benefit usually grows as profits rise and when you can leave some money in the company.
