When changing from working as a sole trader to running a limited company, you’ll need to consider how your business might change and what you’ll need to be aware of. If you’re not sure what business structure is right for you, we’ve written an article to help.

If you think you’re ready to make the change, here’s a simple explanation of when to make the transition and what to keep in mind, without all the jargon.

When is the right time to form a limited company?

People tend to start up as a contractor or freelancer as a sole trader due to the ease of the set-up and lower administrative burden. But after increasing their earnings, many consider setting up a limited company.

The common rule is that when your earnings remain low, it may be best to remain as a sole trader, unless you need other benefits such as limited liability. As a sole trader, your tax and accounting responsibilities will be relatively simple.

When your earnings start to pick up, it becomes more economical to move to a limited company format and save yourself money on tax. Our Take-Home Pay Calculator can show you how much this might be. Recent changes in taxation including the introduction of 25% corporation tax, reduction in class 4 National Insurance rate from 9% down to 6% & increase in Lower Profit Limits to £12,570 and making class 2 National Insurance voluntary means a sole trader pays less tax.

However, the limited company still offers more tax efficiencies when factoring control over how you are taxed so our simple rule of thumb is that as your sole trader profits reach £50,000 per year, you should be looking to incorporate.

What are the benefits of setting up a limited company?

Our article about sole trader vs limited company vs umbrella goes into all the details, but to help you make an informed choice it may also be worth reading our guide to the pros and cons of opting for a limited company structure for your venture.

1. You need to set up a separate bank account

One of the benefits of running a limited company is that you won’t be personally responsible if your company makes any losses or has a claim made against it, which means all of your business finances must be in the business name.

Limited companies need to have separate accounts in the company name as the money belongs to the company and not the director. Set up a separate business bank account in the name of your limited company. Don’t use the personal bank account you may have used when you were a sole trader as you could receive some nasty tax consequences.

2. Income is processed differently

Your personal income from your limited company will be paid to you in a director's salary and dividends. Dividends are taken from the profits of your company after paying Corporation Tax and are paid to you because you’re a director and shareholder in the company. See our article on how much salary you should take from your limited company.

Since your tax will be calculated differently, you’ll need to keep your personal and business financial affairs (including bank accounts) completely separate.

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3. You’ll have different taxes to report and pay.

As a sole trader, You would’ve been submitting your Self Assessment for HMRC to tell you the tax and self-employed National Insurance you needed to pay. As a limited company director, you’ll still need to file an annual Self Assessment tax return, but also file a regular payroll (usually monthly) for any salary you take. You’ll need to declare any dividends you receive from your limited company and any other sources of income you may have. You'll also need to understand your tax obligations, and you may even want to delve into the taxation advantages of electric vehicles for your company car.

Limited company directors need to file various tax returns and accounts to HMRC and Companies House. You’ll also need to pay your company's Corporation Tax Bill. We’ve got separate articles on Small Business taxes and your responsibilities as a company director.

4. Business expenses are treated differently

You can claim tax relief on a variety of business-related expenses as a limited company that you couldn’t as a sole trader. 

Our article on limited company business expenses will help you understand what you can and can’t claim for.

FAQs about changing from a sole trader to a limited company

Who should be a director?

Usually, if you’re setting up a limited company for your business then you’ll also be a director. It’s not too difficult, but there are things you’ll need to be aware of as a director. But what about if you’re working with a business partner, or you want your spouse or partner to be a director and shareholder? 

These can be difficult decisions with potentially costly implications if you get them wrong, so we’d recommend getting some professional advice from a reputable online accountant like Crunch. All of our paid accounting plans come with unlimited access to accounting experts and qualified accountants to make sure all your questions are answered.

Interested? Book a free consultation with our team to see how we could help you!

How do I transfer my assets to a limited company?

If you bought any business assets when you were working as a sole trader, you’ll be able to transfer them to your limited company when you incorporate. However, there might be tax implications of doing this, therefore it’s vital you speak with an accountant for bespoke advice.

What about Corporation Tax?

When you’re self-employed (as a sole trader) you pay tax on your income via your annual Self Assessment. Depending on your earnings, you may have to pay Income Tax at the highest rate (45%) and National Insurance as well. 

When you’re a limited company, the main rate of Corporation Tax (in the 2024/25 tax year) if your profits are less than £50,000 is 19% but if profits are greater than £250,000, you will pay corporation tax at 25%. You will be given a marginal relief if your profit falls between £50,000 and £250,000. Don’t forget you’ll still pay personal tax on any salary or dividends taken from your limited company via your Self Assessment. However, with careful planning, you can minimise the amount of tax you pay. Try our free Take Home Pay Calculator or speak to one of our advisors.

What is IR35 and how will it affect me?

IR35 is tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used. Such workers are called 'disguised employees' by Her Majesty's Revenue and Customs (HMRC).

The reason this legislation exists is that HMRC is concerned that some businesses are using their limited companies solely to pay less tax. 

You’ll need to know whether any contract you take on as a limited company is subject to IR35 rules or not. HMRC are strict on this and can impose taxes and penalties if you get it wrong.

What do I need to tell HMRC?

You need to notify HMRC that you are now working as a director and that you aren’t working as a sole trader anymore, as your tax payments will change. 

We can take care of getting your new limited company set up and registering you for all the correct taxes if you become a Crunch limited company accounting client. Even if you’re not a Crunch client, you can still use our Crunch formations service to set up your limited company in just a few minutes.

The importance of a good accounting set-up

What this all emphasises is the key role that your accountant plays in ensuring a limited company set-up is best for you. Traditionally, one of the aspects of a limited company that puts people off is the perceived hassle that setting up and running one creates.

However, with advances in technology, there’s no longer an excuse for the administration of your limited company to be overly time-consuming. 

For example, online technology can be used to enable automatic invoice processing, automatic VAT calculations (should you decide to be VAT registered), and expenses management.

It seems only natural that freelancers and contractors working online are able to maintain and check their business accounts via the cloud. Almost all accountants now use cloud technologies and Artificial Intelligence to look after their clients’ affairs. 

HMRC also recognises the importance of technology through its Making Tax Digital (MTD) strategy for the online filing of tax information for businesses and individuals.

Without the right technology in place, running a limited company can be an unwelcome burden for freelancers and contractors.

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The ideal accountancy model to support your limited company

The ideal model to provide the accountancy support your limited company needs is an all-in-one accounting solution that enables you to manage everything online with handy apps, while having access to expert accountants as and when you need them.

Some accountants offer these services, but make sure you check the small-print. Some online products are advertised as being supported by accountants, without actually providing you with access to the advice you need. It simply means that accountants can update your online software with your income and expenses if you give them your passwords. 

Another area to consider is the costs your accountant will charge you. These vary greatly and whilst some accountants promise low rates, it’s the hidden costs and added extras that can soon stack up. 

For example, if you phone your accountant for advice, will they charge you for contacting them? Are there any extra charges for essential tasks such as sending information to HMRC and Companies House? Do they charge you for basic personal and company tax advice? 

Because of the wide range of pricing models in the industry, many small business owners are put off from forming their own limited company. Why form a limited company if there’s no guarantee of getting the level of service you need at a cost you can afford? 

It’s a real shame if people are missing out on the benefits of running their own limited company because they can’t find the right accountancy solution.

However, owning a limited company isn’t just about saving money - it’s also an issue of financial security and the ability to separate the financial health of your business from your personal finances. It’s for these reasons that Crunch was formed in the first place: by combining online technology with real accountants on the end of a phone and email, accounting should be a breeze.

Get an accountant!

Well, we would say this, wouldn't we! Getting an accountant is a great way to keep on top of your finances. They’ll remind you of important tax deadlines and payments due, show you ways of keeping your accounts in excellent shape, and advise you on allowable expenses and how to report them so you’re as tax efficient as possible.

They can help you with things like estimating how much tax and NI you’ll need to pay every six months - or quarterly for VAT. They’ll also help to ensure you’re not forgetting any payment on account, which catches many people out every year.

Still curious about the perks of becoming a limited company? Read our tips on choosing the right legal structure for your business, or simply contact us for more information.

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