Self-Employed or Limited Company in 2025? Let’s Break It Down
So, you’re standing at the fork in the road that so many small business owners eventually reach: do I keep going as a self-employed sole trader, or is it time to make the leap and set up a limited company? If you’ve been wrestling with this decision over a cup of tea (or during a late-night accounting panic), you’re not alone.
In fact, this is one of the most common questions I get from clients! And in 2025, the decision has a few new layers thanks to changing tax thresholds, digital reporting rules, and HMRC’s ever-watchful eye.
So let’s have an honest chat about it. We’ll walk through the real differences between being self-employed and running a limited company, what’s changed recently, and how to figure out what’s actually best for you-not just on paper, but in real life.
The Self-Employed Path: Simple and Straightforward (Mostly)
Let’s start with the simpler setup: self-employment. This is how a lot of us begin. It’s flexible, it's easy to register with HMRC, and you can get going with very little red tape. For many people, especially creatives, tradespeople, consultants, and freelancers, this feels like the most natural fit.
You only need to file one Self Assessment tax return each year, track your income and expenses, and pay tax on your profits. And profits just mean the money you’ve made after subtracting all your allowable business expenses-things like software, travel, equipment, insurance, and a portion of your home bills if you work from home.
As of 2025, the Personal Allowance (the bit you can earn before paying any income tax) is still £12,570. Anything above that gets taxed, and here’s where it starts to bite:
You’ll pay 20% tax on profits between £12,571 and £50,270.
40% on profits from £50,271 to £125,140.
And 45% on anything over £125,140.
Then there’s National Insurance. You’ll be paying Class 2 (a flat weekly rate if you earn over £6,725) and Class 4 (9% on profits between £12,570 and £50,270, and 2% above that).
It can feel a bit hefty, especially if you’re earning into that 40% tax band. But the simplicity appeals to many, especially if your income varies month to month or if you’re not ready to take on the admin burden of a company.
But What About the Paperwork?
This is where some of my clients breathe a sigh of relief. As a sole trader, your admin load is lighter. No need to file corporation tax returns, annual accounts, or confirmation statements. No separate payroll setup if it’s just you. You do need to stay on top of your bookkeeping (and if you’re not a spreadsheet person, trust me, accounting software or a good accountant is your best friend), but it’s generally manageable.
Making Tax Digital Is Coming for You
Ah, but there’s a twist. Making Tax Digital (MTD) is the big shake-up that’s been slowly rolling out over the past few years, and it’s finally going to hit sole traders more broadly in 2026.
If your self-employed income (or property income) is over £50,000, you’ll need to start keeping digital records and sending updates to HMRC every quarter instead of once a year. And if you’re earning over £30,000, that’s coming in 2027.
It’s not here just yet-but it’s coming. And while it’s meant to streamline the process, it’s also more work. For some, this is the nudge that pushes them toward becoming a limited company, where quarterly reporting is already part of the game.
The Limited Company Path: A Bit More Work, But Often Worth It
Now let’s look at limited companies. This route comes with more admin and a steeper learning curve-but also some serious perks, especially when it comes to tax planning and liability protection.
The biggest difference is that your business becomes a separate legal entity. That means the company owns its profits, and it’s the company-not you-that pays Corporation Tax. You can then pay yourself from the company through a salary, dividends, or both.
For 2025, Corporation Tax remains tiered:
19% for profits under £50,000.
25% for profits over £250,000.
A sliding scale (called marginal relief) for anything in between.
So if your profits fall in the sweet spot-say, £60,000 to £150,000-you might pay less overall tax through a company setup compared to being taxed as a sole trader.
Pay Yourself Smartly
This is where limited companies can be strategic. Most directors pay themselves a small salary (usually around the Personal Allowance to stay under the tax threshold) and then top it up with dividends. Dividends are taxed differently:
In 2025, the dividend allowance is down to £500 (yes, it used to be much higher).
After that, you pay 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) depending on your income.
Even with the shrinking dividend allowance, this can still be more tax-efficient than paying yourself a full salary as a sole trader.
The Liability Factor
One of the biggest reasons people incorporate is personal protection. As a limited company director, your personal assets are generally protected if your business runs into financial trouble. That’s not the case for sole traders-you’re personally liable for any debts.
This can make a huge difference if you’re working in a higher-risk industry, signing big contracts, or just want peace of mind that your home and savings aren’t on the line.
The Admin Reality Check
Here’s the not-so-fun bit: more admin. Limited companies have to file annual accounts, a Corporation Tax return, a confirmation statement, and run payroll if you’re paying yourself a salary. You’ll also need to maintain proper accounting records and maybe even register for VAT if you’re earning over £90,000.
But it’s not as scary as it sounds with the right support. This is where having a good accountant (ahem, like Lauren’s Ledger!) can make all the difference. We help clients manage all of this behind the scenes, so they can focus on running their businesses.
Real Talk: What I Tell My Clients
When a client comes to me and says, “Lauren, should I become a limited company?” I ask a few simple questions:
How much are you earning, and is that likely to grow?
Do you have big plans that might involve hiring, partnerships, or investment?
Are you losing sleep over your tax bill or worried about liability?
How do you feel about admin and paperwork?
If you’re earning under £30,000, staying self-employed often makes sense. Between £30,000 and £60,000, it depends on your personal goals. Above £60,000? It’s definitely worth running the numbers and considering incorporation. And if you’re scaling, hiring, or planning for the future, a limited company gives you more structure and protection.
Final Thoughts
There’s no one-size-fits-all answer. It’s about what fits your business, your lifestyle, and your goals. Some people love the simplicity of being self-employed. Others thrive on the structure (and tax benefits) of a limited company. And there’s no shame in changing your setup as your business evolves.
So take a breath, make a cuppa, and know that whichever path you choose, you’re not stuck there forever. You can always reassess-and we’re here to help when you do.
If you’re still feeling stuck, why not book a free strategy call with me and let’s discuss! There’s no obligation, just friendly advice!