There are over 5 million limited companies registered in the UK right now, according to Companies House. That’s a lot of people who’ve made the switch. But I’ve spoken to plenty of lads who set one up because someone told them it was a good idea, and they still don’t fully understand what they’re running or why. I’ve had a limited company for years across my fireplace business and a few online projects, so here’s what I actually think, not the watered down version you get from a formation agent trying to sell you something.
What a Limited Company in the UK Actually Is
When you’re a sole trader, you and your business are legally the same thing. That means if your business gets sued, or runs up debt it can’t pay, your personal stuff is fair game. Your car, your savings, your house. All of it.
A limited company changes that. The company is its own legal entity, separate from you as a person. Your liability is capped at whatever you’ve put into it. If things go wrong, creditors go after the company, not you personally. That alone is worth taking seriously if you’re doing anything with real money involved.
There are two types worth knowing about.
Private Limited Company (Ltd)
This is what almost every small business owner in the UK goes for, including me. Shares are privately held, there’s no stock exchange involvement, and it works whether you’re a one man band or building a team. If you’re reading this, it’s almost certainly what you want.
Public Limited Company (PLC)
A PLC can sell shares to the public and needs at least £50,000 in share capital, according to Companies House. Unless you’re planning a float, you can ignore this entirely.
The Tax Side of a Limited Company UK: Where It Gets Interesting
This is the bit most people come here for, and honestly it’s where a limited company earns its keep if your numbers stack up.
As a sole trader, you pay income tax on your profits. Once you’re earning above £50,271, that jumps to 40%, according to HMRC. As a limited company, your profits get taxed at corporation tax rates instead. For 2024/25 that’s 19% on profits up to £50,000, with marginal relief between £50,000 and £250,000, and 25% above that, according to HMRC. The gap between 40% income tax and 19% corporation tax is where the savings live.
On top of that, most directors pay themselves a low salary and take the rest as dividends. Dividends are taxed more favourably than salary. For 2024/25 the rates are 8.75% for basic rate taxpayers, 33.75% for higher rate, and 39.35% for additional rate, according to HMRC. Combine that with a salary set at the right level and your overall tax bill drops significantly compared to being a sole trader on the same income.
What That Looks Like With Real Numbers
Say your company turns a £60,000 profit. You pay yourself a salary of £12,570, which sits within the personal allowance so you pay no income tax on it. You then take £30,000 as dividends. After accounting for corporation tax on the profits retained in the company, and dividend tax on what you’ve drawn, you’ll come out paying considerably less than a sole trader on the same earnings. Most decent accountants will show you a comparison before you commit. The saving is regularly four figures. Sometimes it’s five.
The Honest Pros and Cons
I’m not going to dress this up. There are genuine downsides and you need to know them going in.
What Works in Your Favour
The liability protection is real and it matters. The tax efficiency through salary and dividends is real and it saves money. A limited company also carries more credibility with bigger clients. Some corporate contracts and public sector tenders will only deal with a limited company full stop. And because the company is its own legal entity, it can outlive your involvement in it, which is useful if you ever want to sell or bring someone else in.
What People Don’t Warn You About
The admin is genuinely heavier. You’ve got annual accounts to file with Companies House, a confirmation statement every year, corporation tax returns with HMRC, and payroll to run even if you’re the only person on it. Miss a deadline and the fines are automatic, no grace, no phone call first. You’ll want an accountant. A good one costs between £500 and £2,000 a year depending on what’s involved, based on typical market rates. And your financials go on public record at Companies House, which not everyone realises before they sign up.
When Does It Actually Make Sense to Go Limited?
The honest answer is somewhere around £30,000 to £35,000 in annual profit, give or take. Below that, the tax saving often doesn’t cover the accountancy costs and extra time. Above it, the maths starts working in your favour pretty quickly.
If you’re just starting out and making modest money, sole trader is simpler and cheaper to run. Once you’re consistently profitable and thinking about growth, a limited company gives you more to work with. That was the point I made the move, and I’ve not regretted it.
It also makes sense if you want to take on a business partner and issue shares properly, bring in outside investment, or build something with the intention of selling it eventually. A limited company structure makes all of those conversations much cleaner.
Frequently Asked Questions
How much does it cost to set up a limited company in the UK?
Registering directly with Companies House costs £50 online, according to their guidance. Formation agents charge anywhere from £10 to £100 depending on what’s included. It’s genuinely one of the cheapest things you’ll do that actually protects you.
Do I need an accountant to run a limited company?
You don’t legally have to have one. But in practice, most people find the filing requirements, payroll, and corporation tax returns aren’t worth handling themselves once you factor in the time. A decent accountant will save you more than they cost through tax planning alone.
Can I run a limited company on my own as the only director and shareholder?
Yes, completely. A single-person limited company is legal and very common. You’re the director, the sole shareholder, and the only employee if you choose. Loads of contractors, freelancers, and small business owners run exactly this way.
A limited company isn’t a shortcut or a tax dodge. It’s a structure that rewards you when your profits justify the setup. If you’re earning decent money, carrying real business risk, or trying to build something worth owning, it’s almost certainly worth doing. Get an accountant who’ll give you a straight comparison for your specific numbers, and make the decision based on that rather than what worked for someone else.
Icebug Wealth does not provide regulated financial advice. Everything here is based on personal experience and research. Always do your own due diligence before making any financial decisions.