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Sole Trader vs Limited Company: Which Is Right for You?
Disclaimer: BeautyKiln gives general information, not legal, tax or financial advice. Talk to a qualified professional before making big decisions.
Sole Trader vs Limited Company: Which Is Right for You?
The question every self-employed beauty worker eventually asks: should I stay as a sole trader or set up a limited company? This guide compares both structures with real numbers at typical beauty earnings, so you can make a decision based on facts rather than guesswork.
Quick rule of thumb: if you're earning under £35,000 profit, stay as a sole trader. Above £40,000, a limited company starts saving you real money - but it comes with more admin.
The basics
Sole trader
You and the business are the same legal entity. You keep all the profit, you're personally liable for all debts, and you pay Income Tax and National Insurance on your profits through Self-Assessment.
Limited company
The company is a separate legal entity. You're a director (and usually the only shareholder). The company pays Corporation Tax on its profits. You pay yourself through a combination of salary and dividends, which is often more tax-efficient - but there's more paperwork.
Side-by-side comparison
| Feature | Sole trader | Limited company |
|---|---|---|
| Setup cost | Free (register with HMRC) | £12-£50 (Companies House) + accountant fees |
| Annual admin | Self-Assessment tax return | Company accounts, confirmation statement, CT600, personal Self-Assessment, payroll |
| Accountant cost | £150-£400/year | £600-£1,500/year |
| Personal liability | Unlimited - your personal assets are at risk | Limited to what you've invested in the company |
| Tax on profits | Income Tax (20-45%) + NI (Class 2 + Class 4) | Corporation Tax (19-25%) + tax on salary/dividends |
| Taking money out | Just take it - it's yours | Salary, dividends, or pension contributions only |
| Privacy | Your business address isn't public | Company details are on public record at Companies House |
| Perceived professionalism | Fine for most beauty work | "Ltd" after your name - some see this as more professional |
| Closing down | Tell HMRC, done | Formal process through Companies House |
Worked tax examples (2025/26 rates)
These examples assume you have no other income, use the standard personal allowance (£12,570), and take the simplified expenses where applicable. Real figures will vary - these are illustrations to show the general pattern.
At £25,000 profit
Sole trader:
| Item | Amount |
|---|---|
| Profit | £25,000 |
| Personal allowance | -£12,570 |
| Taxable income | £12,430 |
| Income Tax (20%) | £2,486 |
| Class 2 NI (£3.50 x 52, 2025-26 rate) | £182 |
| Class 4 NI (6% on £12,570-£25,000) | £746 |
| Total tax + NI | £3,411 |
| Take-home | £21,589 |
Limited company (paying yourself £12,570 salary + rest as dividends):
| Item | Amount |
|---|---|
| Company profit before salary | £25,000 |
| Director salary | -£12,570 |
| Employer NI on salary | -£0 (salary at NI threshold) |
| Taxable company profit | £12,430 |
| Corporation Tax (19%) | £2,362 |
| Available for dividends | £10,068 |
| Dividend tax (8.75% on amount above £500 allowance) | £837 |
| Total tax | £3,199 |
| Take-home | £21,801 |
Saving with Ltd: ~£212/year - not enough to justify the extra accountant fees and admin.
Tip for new starters: If you're in your first year and still building a client base, don't even think about going limited. Stick with sole trader, keep your admin simple, and focus on filling your column. You can always incorporate later when your profits justify it.
At £35,000 profit
Sole trader:
| Item | Amount |
|---|---|
| Profit | £35,000 |
| Personal allowance | -£12,570 |
| Taxable income | £22,430 |
| Income Tax (20%) | £4,486 |
| Class 2 NI | £182 |
| Class 4 NI (6% on £12,570-£35,000) | £1,346 |
| Total tax + NI | £6,011 |
| Take-home | £28,989 |
Limited company:
| Item | Amount |
|---|---|
| Company profit before salary | £35,000 |
| Director salary | -£12,570 |
| Taxable company profit | £22,430 |
| Corporation Tax (19%) | £4,262 |
| Available for dividends | £18,168 |
| Dividend tax (8.75% above £500 allowance) | £1,546 |
| Total tax | £5,808 |
| Take-home | £29,192 |
Saving with Ltd: ~£203/year - still marginal. Factor in the extra accountant cost (maybe £400-£800 more per year) and you could actually be worse off.
At £45,000 profit
Sole trader:
| Item | Amount |
|---|---|
| Profit | £45,000 |
| Personal allowance | -£12,570 |
| Taxable income | £32,430 |
| Income Tax (20% on first £37,700 = all taxable) | £6,486 |
| Class 2 NI | £182 |
| Class 4 NI (6% on £12,570-£45,000) | £1,946 |
| Total tax + NI | £8,611 |
| Take-home | £36,389 |
Limited company:
| Item | Amount |
|---|---|
| Company profit before salary | £45,000 |
| Director salary | -£12,570 |
| Taxable company profit | £32,430 |
| Corporation Tax (19%) | £6,162 |
| Available for dividends | £26,268 |
| Dividend tax (8.75% above £500 allowance) | £2,255 |
| Total tax | £8,417 |
| Take-home | £36,583 |
Saving with Ltd: ~£194/year - but wait. At this level, you can also leave money in the company, make pension contributions through the company (which are a Corporation Tax deductible expense), and use other strategies that a good accountant can help with. The real savings at £45k+ come from tax planning, not just the basic structure.
When a limited company makes sense
A limited company usually starts making financial sense when:
- Your profits are consistently above £35,000-£40,000 and you can leave some money in the company
- You want to make pension contributions through the company (they reduce your Corporation Tax bill)
- You need limited liability - if you're worried about being personally sued (though insurance usually covers this in beauty)
- You're planning to take on staff and grow the business
- You want to sell the business one day - it's easier to sell a company than a sole trader business
When to stay as a sole trader
Stay as a sole trader if:
- Your profits are under £35,000 - the tax savings don't cover the extra costs
- You want simplicity - one tax return, no company accounts, no payroll
- You take all your profit each month - there's no advantage to a company if you're drawing everything out
- You're just starting out - get established first, incorporate later if it makes sense
- You work alone with no plans to hire
The costs of a limited company
People often focus on the tax savings but forget about these:
- Accountant fees go up - from maybe £300/year as a sole trader to £800-£1,500/year as a company director. You'll need company accounts filed with Companies House, a Corporation Tax return (CT600), payroll processing, and your own personal Self-Assessment.
- Filing deadlines - you have more deadlines to hit. Miss them and Companies House charges penalties (from £150 for being a day late on accounts, up to £1,500 for being 6+ months late).
- Public record - your company accounts are visible to anyone on the Companies House website. Your name, address (or registered office), and financial information are public.
- Director responsibilities - you have legal duties as a director. You must act in the company's best interests, keep proper records, file on time, and not trade while insolvent.
- Taking money out is more complicated - you can't just dip into the business account. You need to pay yourself properly through salary and dividends, and keep records of both.
- Closing down is harder - if you decide to stop, you need to formally dissolve the company through Companies House or go through a members' voluntary liquidation if there's money left.
The beauty-specific angle
Most beauty workers - chair renters, mobile hairdressers, beauty therapists, nail techs - earn between £20,000 and £35,000 profit. At that level, a limited company rarely makes financial sense once you factor in the extra accounting costs and admin time.
The exceptions in beauty tend to be:
- Busy aesthetics practitioners doing injectables, skin treatments, or laser work - they can hit higher earnings
- Salon owners with multiple staff and higher turnover
- Beauty workers with a product line alongside their services
If you're a chair renter earning £25k-£30k, a sole trader structure is almost certainly the right choice. Spend the money you'd waste on company accounting fees on better insurance or training instead.
Tip for new starters: If someone at a networking event or on social media tells you to "go limited straight away for tax savings," ask them what their profit is. The advice usually comes from people earning £50k+ and doesn't apply to someone starting out on £20k-£30k.
How to switch later
If you start as a sole trader and your earnings grow, you can incorporate later. It's not a one-way decision. Here's what's involved:
- Set up a limited company through Companies House (gov.uk/set-up-limited-company) - costs £12 online
- Tell HMRC you've stopped being a sole trader
- Register the company for Corporation Tax
- Set up payroll to pay yourself a salary
- Open a business bank account in the company's name
- Transfer clients and contracts to the new company (your clients probably won't notice)
- File a final Self-Assessment for your sole trader earnings up to the date you incorporated
Most accountants can handle this for you. It's worth paying them to get it right.
What to do next
- Work out your actual profit (income minus expenses) for the last 12 months
- If it's under £35k - stay as a sole trader. Revisit in a year.
- If it's £35k-£45k - talk to an accountant about whether incorporating makes sense for your specific situation
- If it's over £45k - seriously consider a limited company, but get proper advice first
- Don't incorporate just because someone told you to - run the numbers for YOUR situation
Who to Contact
- HMRC Self-Assessment - general tax questions - 0300 200 3310 (Free)
- Companies House - company formation and filing - 0303 123 4500 (Free)
- Citizens Advice - guidance on business structures and self-employment - 0800 144 8848 (Free)
- An accountant - for personalised advice on your structure (Paid - worth every penny at this stage)
- ICAEW Find a Chartered Accountant - find a qualified accountant near you - icaew.com/find-a-chartered-accountant (Free to search)
Sources
- Income Tax Act 2007
- Corporation Tax Act 2009
- Companies Act 2006
- HMRC guidance: Running a limited company, gov.uk/running-a-limited-company
- HMRC guidance: Working for yourself, gov.uk/working-for-yourself
Related Guides
- Registering as Self-Employed
- First 30 Days Checklist
- Self-Assessment for Beauty Therapists
- Tax-Saving Strategies
- Business Banking for Beauty
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Key Contacts
HMRC Self-Assessment
general tax questions - 0300 200 3310Free
Companies House
company formation and filing - 0303 123 4500Free