Stay self-employed or go limited?

First, whose debts are they?

When you’re a sole trader, you and your business are legally the same person. If the business owes money to suppliers, lenders or HMRC, that debt is yours. A limited company is separate from you, so its debts normally stay with the company. That separation can make a real difference to your personal finances if things go wrong.

This is why our starting advice at Hatch for VAT-registered trading businesses is to go limited. We’d rather not see a business VAT bill become a personal financial problem. The protection isn’t absolute, though: personal guarantees, wrongdoing and certain tax rules can still leave directors personally liable. Setting up a company won’t make existing personal business debts disappear, either.

MTD has changed the cost comparison

Making Tax Digital for Income Tax means affected sole traders must keep digital records, send quarterly updates and still complete an annual tax return. It started in April 2026 for qualifying income above £50,000, with the threshold dropping to £30,000 in April 2027 and £20,000 in April 2028. These thresholds look at income before expenses, including relevant rental income, using earlier tax years—not simply this year’s profit.

HMRC says this should reduce errors. Fair enough, but it also means the state gets your business figures more often. We see that as closer oversight, not just a software upgrade. HMRC receives summaries rather than every individual receipt, but there are still more reporting deadlines for you to manage.

At Hatch, our MTD fees start at £50 a month. Our limited-company fees also start at £50 a month for turnover below £30,000, and £82.50 a month for turnover from £30,000 to below £90,000. The gap may therefore be smaller than you’d expect, although a proper comparison needs to include the same services, software and any VAT.

Company accounts and Corporation Tax returns are normally annual, rather than following the new quarterly Income Tax reporting routine. That doesn’t mean companies only have one deadline: payroll reporting and usually quarterly VAT returns still need dealing with. Going limited changes the paperwork; it doesn’t make it vanish.

What about the tax?

As a sole trader, you pay tax on your taxable profit, not just what you take out. Leaving money in the business account doesn’t put the tax bill on hold. With a company, there’s Corporation Tax on company profits and potentially personal tax on your salary and dividends. We need to add those together—the “global tax” bill—rather than admire one low-looking tax rate and ignore the rest. GOV.UK

A company becomes particularly interesting when the business earns more than you need personally. You can take around £50,000 through salary and dividends, stay below higher-rate personal tax assuming no other income, and leave the remaining profit in the company after Corporation Tax. Here’s what that can look like...

Take a business making £100,000 profit before paying its owner’s salary or employer’s National Insurance. As a sole trader, you’d pay approximately £30,689 in Income Tax and National Insurance, leaving £69,311 after tax. That’s roughly £5,776 a month available personally, whether you spend it or leave some in the business.

Through a company, suppose you take £50,000 before personal tax, made up of a £12,570 salary and £37,430 in dividends. Your dividend tax would be approximately £3,970, leaving £46,030 personal take-home income, or about £3,836 a month. That’s your spendable income - not £50,000 after tax.

The company would pay approximately £19,118 Corporation Tax and £1,136 employer’s National Insurance, leaving £29,746 inside the company after paying you. Add the company and personal taxes together and the combined bill is £24,224-£6,465 less than the sole trader pays that year. You receive less personally, but more remains across you and the company combined.

The important bit is that the £29,746 still belongs to the company. Taking it out later could mean more personal tax, so that £6,465 difference isn’t a guaranteed permanent saving. The benefit is having more control over when you take income and pay personal tax, particularly when you don’t need every pound straight away.

Paying yourself and involving the family

Your company can pay you through payroll and, as a shareholder, pay you dividends from available profits. It can also make pension contributions, which may reduce its taxable profit when the relevant rules are met. There’s room to plan around what you need now and what you’re putting away for later.

Family members can be paid reasonable wages for genuine work, although sole traders can do that too. A spouse or civil partner who genuinely owns suitable shares may also receive dividends, potentially making better use of their own tax allowances and bands. These arrangements need setting up properly: wages are for work, and dividends come with real share ownership—not just a name added to the paperwork.

So, should you make the switch?

There are responsibilities that come with the protection. Company records and filings need keeping up to date, and the business bank account isn’t your personal wallet. Money you take out needs to be recorded properly; otherwise, you can end up with a director’s loan and another tax issue to sort out.

For a smaller, low-risk business where you need most of the profit to live on, staying self-employed may be perfectly sensible. But VAT exposure, growing profits and money you can afford to leave in the business are good reasons to look again. At Hatch, we’d rather work through what you need to take home, what you’re risking and what the whole thing costs. The right answer should fit your life, not just look clever on a tax calculation.

The illustration uses 2026/27 rates for England, Wales and Northern Ireland, rounded to the nearest pound. It assumes one working-age owner, no other income, a full trading year, no associated companies and no Employment Allowance. Accountancy fees, pensions and student loans are excluded. Scottish Income Tax needs a separate calculation.