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Many business directors start out as a freelancer or contractor and then make the switch from sole trader to limited company!

According to the latest statistics, sole traders make up more than half of the 5.6 million private SMEs in the UK. Sole traders are also known as self-employed and cover the full range of industries and services.

And as those 3.1 million people see their businesses grow, many consider becoming a limited company. We’ve looked at what a limited company is before, so check out that blog for more details.

But what about the right time to make the move from being a sole trader to becoming a director of your own limited company?

The right time to go from sole trader

Setting up as a sole trader is relatively easy and has low costs as you don’t need all the administration of a limited company. Tax and accounting responsibilities are pretty simple, which makes it an attractive option for those starting out.

But once your earnings start to increase, setting up as a limited company makes a lot of sense.

Generally, once your profits as a sole trader reach £30,000 a year, the tax savings outweigh the costs of running a limited company.

Of course, as we’ve already highlighted, you will see an increase in paperwork to file. But those tax savings makes it worthwhile.

How to go from sole trader to limited company

Once you have made your decision to become limited, there are a number of areas of action that you’ll need to take.

First of all, limited companies need separate bank accounts. While sole traders can use a personal account, a business that’s limited cannot. The account should be set up in the name of your limited company.

Other points to remember are:

  • Your income comes to you as a director’s salary and dividends
  • You’ll not only to need file a self assessment tax return you’ll also file a regular payroll
  • You will be able to claim tax relief on business-related expenses that you cannot as a sole trader

Tell Companies House

If you are setting up as a limited company you’ll have to tell Companies House. It costs £12 and usually takes about 24 hours to be registered. For full information about the personal information Companies House requires, check their website.

Transferring your assets

Once you decide to become limited, you will need to transfer any business assets when you incorporate your business. These include assets such as equipment or stock. There will be tax implications, so contact an accountant before you do that.

Corporation Tax

As a sole trader, you pay tax on your income via self assessment tax returns annually. You also pay National Insurance as part of your annual self assessment payments. As well as paying your personal tax on your salary and dividends, your limited company will also pay Corporation Tax.

It’s worth talking to your accountant before you make your decision as you can minimise the tax you pay through careful planning.


Once you decide to switch from self employment to running your business as a limited company, you will need to notify HMRC. They need to know that you are no longer a sole trader but a director of a company.

Speak to your accountant first as they can take care of setting up your business as a limited company.


This tax legislation was introduced as HMRC believed many people directly employed by a company should be considered an employee. This is particularly the case if you’re a sole trader and only have one client. Some self employed people set up a limited company to carry out this work simply to reduce their tax bill.

If you are a limited company, carefully check any contracts to ensure they are not subject to IR35 rules. HMRC is strict about these rules and will impose penalties if you get them wrong.

Need help?

If you need help switching from being a sole trader to a limited company, we’d love to help you. Contact us using the form below.