Self-Employed vs Limited Company

If you’re starting a business or going freelance in the UK, one of the first major decisions you’ll face is how to structure your business. Should you operate as self-employed, or form a limited company?

Each route has its own pros and cons, and the right choice depends on factors like your income level, risk exposure, long-term plans, and how much admin you’re prepared to handle.

In this post, we break down the key differences between being self-employed and running a limited company, to help you make an informed decision.

What Does Self-Employed Mean in the UK?

Being self-employed typically means you operate as a sole trader. You run your business as an individual and keep all profits after tax.

You’ll need to:

• Register with HMRC as self-employed via Self Assessment
• Keep records of income and expenses
• File an annual tax return
• Pay Income Tax and Class 2 and Class 4 National Insurance

It’s the simplest and most flexible business structure in the UK.

What Is a Limited Company?

A limited company is a business that is legally separate from its owners. You register it with Companies House, and it becomes its own legal entity.

This means:

• The company owns its assets and is responsible for its debts
• You are a director of the company and may also be a shareholder
• You pay yourself a salary, dividends, or both
• The company pays Corporation Tax on profits
• You file annual company accounts and a Confirmation Statement

Key Differences: Self-Employed vs Limited Company

Let’s compare the two side-by-side across the most important categories:

Advantages of Being Self-Employed

Simple and Quick to Set Up

Registering as a sole trader takes just minutes using HMRC’s online portal. No Companies House registration, no incorporation documents, and no need for a company bank account.

Set up as a sole trader – GOV.UK

Minimal Paperwork

You only need to file an annual Self-Assessment return and keep basic business records. There are no company accounts, annual statements, or statutory registers to maintain.

Full Control and Ownership

You make all decisions and retain 100% of the profits. There’s no need to consult shareholders or directors.

Lower Initial Costs

You avoid incorporation fees, accountant costs for company accounts, and administrative expenses tied to compliance.

Flexible Exit Strategy

You can stop trading or return to employment without any formal dissolution process.

Disadvantages of Being Self-Employed

Unlimited Personal Liability

There is no legal distinction between you and your business. If the business goes into debt, your personal assets (such as your home or savings) could be at risk.

Higher Tax Rates at Certain Levels

Once your profits exceed around £30,000 to £40,000, you may end up paying more tax than a limited company owner would. You cannot take advantage of lower dividend tax rates or Corporation Tax efficiencies.

Use HMRC’s ready reckoner to estimate your tax: Self-employed tax calculator – GOV.UK

Less Credibility

Clients, lenders, and suppliers may view a limited company as more established or professional. This could affect your ability to win contracts or secure funding.

Limited Tax Planning Options

You cannot split income with a spouse through shareholdings, nor can you defer income or take advantage of employer pension contributions.

Making Tax Digital (MTD) Changes

From April 2026, if your turnover is over £50,000, you’ll be required to submit quarterly updates under MTD for Income Tax. This may increase your admin burden.

Making Tax Digital – GOV.UK