At what profit level should I incorporate?

There isn't a threshold any more, and anyone who hands you one hasn't revisited their figures since dividend rates rose. On the worked example above, a sole trader making £70,000 of profit who draws all of it is £868.91 better off than the same business incorporated. The number that decides it is not your profit — it's the gap between your profit and what you actually need to live on. Draw everything and incorporation is a net cost in 2026/27. Leave £15,000 to £20,000 a year in the business and it pays for itself quickly. The answer genuinely flips depending on your drawings, so run your own figures rather than borrowing someone else's rule.

Do I have to tell HMRC when I stop being a sole trader?

Yes. Incorporating does not close your sole trader affairs automatically. You tell HMRC the self-employment has ceased, give the date it stopped, and file a final Self Assessment return covering trading up to that date, due by the normal 31 January deadline for that tax year. If you were VAT registered as a sole trader, the registration belongs to you rather than the company, so you either deregister and register the company separately or transfer the existing registration using form VAT68. Get the VAT step wrong and the company ends up trading on a registration it is not entitled to use. All routine, but it needs doing deliberately.

Can I move my business into the company without a tax bill?

Transferring a business to a company is a disposal for Capital Gains Tax, even though you are in effect selling to yourself. Incorporation Relief under section 162 TCGA 1992 can defer the gain where you transfer the business as a going concern together with all its assets, cash aside, in exchange for shares — the gain rolls into the base cost of those shares instead of being taxed now, and it applies automatically where the conditions are met. Goodwill is the awkward part: since 2015 the company generally gets no Corporation Tax relief for amortising goodwill acquired from a related party, and Business Asset Disposal Relief is denied on goodwill transferred to a close company you control.

Will incorporating make it harder to get a mortgage?

It can, at least for a while. A lender assessing a sole trader looks at the profit shown on your tax returns. Once you incorporate, most lenders look at salary plus dividends instead, which on the standard owner-director setup is a far smaller declared income than the profit the business actually makes. Some will consider retained profit or work from the company accounts, but not all will, and those that do often want two or three years of company figures first. If a mortgage or remortgage is likely within the next couple of years, raise it before you incorporate rather than after — it is one of the few consequences of timing that is genuinely awkward to undo.

Can I go back to being a sole trader if it does not suit?

Yes, though it is more work than going the other way. You would stop trading through the company, transfer whatever assets you need back out — which carries its own tax consequences, because taking assets out of a company at less than market value is treated as a distribution — and then either strike the company off or wind it up formally. Extracting retained profit on the way out can qualify for capital treatment rather than dividend rates, but only where the closure is handled properly and the anti-avoidance rules on starting a similar trade again do not catch you. It is reversible; it simply is not free, which is a decent argument against incorporating speculatively.

Does my company have to pay me a salary at all?

No. Directors are office holders rather than automatically employees, and a company whose only workers are its directors has no obligation to run a payroll. Plenty of owner-directors take dividends only. The reason most take a modest salary anyway is that it is a deductible cost which reduces Corporation Tax, and earnings above the Lower Earnings Limit protect your National Insurance record for the State Pension, which dividends do nothing for. The trade-off is employer's National Insurance at 15% on pay above the £5,000 secondary threshold, and a single-director company with no other employees cannot offset that with the £10,500 Employment Allowance. Set it deliberately rather than copying a figure off a forum.

Sole trader or limited company: when to switch

It's one of the most common questions we get asked, and there's no single moment that applies to everyone. Some businesses should incorporate in year one. Others are better off staying as a sole trader for years. The right answer depends on what the business actually does, how much it makes, and what you want from it — not on a rule of thumb someone read online.

What we can do is set out how the two structures actually differ in practice, run the numbers at a realistic profit level, and describe the kind of situation that usually tips someone from one to the other.

The basic difference

As a sole trader, you and the business are legally the same thing. You keep all the profit, but you're also personally on the hook for the business's debts, and you pay Income Tax and National Insurance on everything the business earns, whether or not you take it out of the business bank account. It's simple to set up and simple to run — which is exactly why it suits a lot of people starting out.

A limited company is a separate legal entity. It pays Corporation Tax on its profits, and you, as a director, decide how and when to take money out — usually as a combination of salary and dividends. Your personal liability is generally limited to what you've invested in the company, rather than everything you own.

Why people assume it's just about tax

Incorporating can be more tax-efficient once profits reach a certain level, because you get more control over how and when income lands on your personal tax return rather than all of it being taxed as it's earned. But treating this purely as a tax decision misses half the picture. Running a limited company also means more admin: separate accounts, Companies House filings, Corporation Tax returns, and a general expectation that things are kept more formally organised — dividend vouchers and board minute documentation among them.

For a lot of businesses that extra admin is worth it. For others, particularly very early on, it's overhead they don't need yet.

The tax case has narrowed — here are the actual numbers

The old advice was blunt: get past roughly £50,000 of profit and incorporate. That rule of thumb was built on dividend rates that no longer exist. Confirmed at the Autumn 2025 Budget, dividend tax for 2026/27 runs at 10.75% in the basic-rate band, 35.75% in the higher-rate band and 39.35% in the additional-rate band — a two-percentage-point rise on the basic and higher rates. If you incorporate and then draw everything out again, that rise eats most of what incorporating used to save.

Here is the arithmetic on an illustrative business — not a client, just a set of figures you can follow — making £70,000 of profit in 2026/27, owner based in England with no other income.

As a sole trader

Personal allowance £12,570, so £57,430 is taxable.
Income Tax: 20% on the £37,700 basic-rate band = £7,540, then 40% on the remaining £19,730 = £7,892. £15,432.
Class 4 National Insurance: 6% on the £37,700 between £12,570 and £50,270 = £2,262, plus 2% on the £19,730 above £50,270 = £394.60. £2,656.60.
Class 2 is treated as paid at this profit level, so nothing further.
Total tax and NI: £18,088.60. Take-home: £51,911.40.

As a limited company, drawing the lot

Same £70,000 of profit before the director is paid. A £12,570 salary, the rest as dividends — the standard owner-director setup.

Employer's National Insurance at 15% on the salary above the £5,000 secondary threshold: £1,135.50. A single-director company with no other employees cannot claim the £10,500 Employment Allowance, so this is a genuine cost.
Company profit after salary and employer's NI: £56,294.50.
Corporation Tax: above the £50,000 small profits limit, so Marginal Relief applies. 25% of £56,294.50 is £14,073.63, less relief of £2,905.58, giving £11,168.05 — an effective rate of 19.84%.
That leaves £45,126.45 to pay out as dividends.
Dividend tax: £37,700 falls in the basic-rate band, of which £500 is covered by the dividend allowance, so £37,200 at 10.75% = £3,999. The remaining £7,426.45 sits in the higher-rate band at 35.75% = £2,654.96. £6,653.96.
Take-home: £12,570 salary + £45,126.45 dividends − £6,653.96 = £51,042.49.

The sole trader is £868.91 better off — and that is before the company's extra accountancy, filing and payroll costs. At £70,000 of profit, if you need every penny of it, incorporating currently costs you money.

The version where incorporating wins

Now change one thing. The owner only needs £45,000 to live on and wants to leave £20,000 in the business — for a hire, a piece of equipment, or simply a buffer.

The sole trader has no choice: all £70,000 is taxed as it's earned, so the bill is still £18,088.60, whether the money is in a business account or not.

The company pays £1,135.50 employer's NI and £11,168.05 Corporation Tax, then distributes £25,126.45 instead of £45,126.45. That all sits in the basic-rate band, so after the £500 allowance the dividend tax is £24,626.45 at 10.75% = £2,647.34. Total across the company and the director: £14,950.89.

That is £3,137.71 less tax in a single year, on identical trading profit. The saving didn't come from incorporating. It came from not needing to draw the money. That is the real test now, and it's a very different question from "how much do I make?"

Two caveats worth stating plainly. Retained profit isn't tax-free forever — it's taxed when you take it, so this is deferral plus rate control, not avoidance. And these figures assume England or Northern Ireland; Scottish income tax bands differ, which shifts the salary side of the comparison but not the Corporation Tax or dividend side. Our salary vs dividend calculator lets you put your own numbers through, and how to pay yourself from a limited company goes further into the extraction side.

Signs it might be time to switch

A few situations come up again and again with clients who are weighing this up. Profit has grown to the point where taking everything as sole trader income no longer feels efficient. You're about to take on a bigger contract or client that expects to be dealing with a limited company. You want the separation between personal and business liability, particularly if the business is taking on more risk — bigger contracts, employees, premises, borrowing. Or you're planning to bring in a co-founder or investor, which is far more straightforward through a company structure with shares than it is between two sole traders.

None of these on their own means you definitely should switch. But if more than one applies, it's worth sitting down and actually running the numbers rather than guessing.

Signs it's not time yet

If you're still finding your feet, income is unpredictable month to month, or you're testing an idea before committing to it properly, staying a sole trader often makes more sense. It's quicker to set up, easier to wind down if things don't work out, and there's less formality getting in the way while you're still working out what the business actually is.

The clearest signal to wait is drawings. If you take everything the business earns because you need it, the numbers above say incorporation is a net cost in 2026/27, and no amount of structuring changes that. A mortgage application in the next two years is the second signal — lenders assess an incorporated owner on salary and dividends, which is usually a much smaller figure than sole trader profit.

A three-question decision rule you can apply this week

If you want something more useful than "it depends", work through these in order. It takes about twenty minutes with your last set of accounts in front of you.

What did you actually draw last year, as a percentage of profit? Take your total drawings and divide by your net profit. Above about 90%, incorporating on tax grounds alone is unlikely to pay at current dividend rates. Below about 70%, it probably does — and the bigger the gap, the bigger the saving.
What would a bad year cost you personally? List what the business could realistically owe if a large customer failed to pay, a contract went wrong, or you had to let staff go. As a sole trader that number lands on your house. If it's larger than you'd be comfortable writing a personal cheque for, limited liability is worth paying for even where the tax says otherwise.
Is anyone else joining? A co-founder, an investor, or a key employee you want to give equity to. Shares make that straightforward; there is no clean equivalent between two sole traders, and retrofitting a company later is more expensive than starting with one.

Two yeses out of three, and it's worth running your own numbers properly. One yes, and you can safely leave it another year.

What switching actually involves

If you do decide to incorporate, the practical steps are more routine than people expect. You register a new company, set up a business bank account in the company's name, and move trading across from your sole trader business to the company from an agreed date. Any assets genuinely used in the business — equipment, stock, sometimes goodwill — get transferred across too, and there are established ways of doing that cleanly rather than informally. None of it needs to be complicated, but it does need to be done properly and recorded correctly, which is exactly where getting it wrong tends to cause problems later.

It's also worth knowing this isn't an irreversible, all-or-nothing decision made once and never revisited. Plenty of businesses start as a sole trader, incorporate a year or two later once profit and risk have grown, and that's a perfectly normal path. There's no penalty for not incorporating from day one just because it might suit you eventually.

Getting the decision right, not just fast

We work with both sole traders and limited company directors, so this isn't a conversation where we're trying to push you toward whichever structure suits us better — it's genuinely about what suits your business. If you're weighing it up, the most useful thing is to look at your actual numbers: what you're earning now, what you expect to be earning in twelve months, what you actually draw, and what kind of risk the business is carrying.

Our longer sole trader vs limited company guide covers the admin side in more detail, and if VAT registration is also on your mind, when to register for VAT is worth reading alongside this — the two decisions often arrive in the same year and people conflate them.

If you want a second opinion on where you sit, get in touch and we'll talk it through properly rather than giving you a generic answer that doesn't account for your specific situation.

Sole trader or limited company: when should you switch?