This is one of the first real decisions anyone starting out as a subcontractor has to make, and one of the most common questions we get from builders scaling up. There's no universal right answer, sole trader and limited company both suit different situations, but the decision comes down to two things that actually matter: tax, and liability. Here's how each one genuinely compares.
The core trade-off, in one paragraph
As a sole trader, you and the business are legally the same thing. It's simple to set up, cheap to run, and all your profit is taxed as your personal income. As a limited company, the business is a separate legal entity: it pays its own Corporation Tax on profit, and you only pay yourself, and pay further tax, when you actually take money out as salary or dividends. That separation is also what gives you limited liability. The cost is more admin: Companies House filings, statutory accounts, and generally higher accountancy fees.
Tax: where the numbers actually land
As a sole trader, all your profit is taxed through Self Assessment: Income Tax at 20% between £12,571 and £50,270, 40% up to £125,140, and 45% above that, plus Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% above. Class 2 National Insurance is no longer a mandatory charge regardless of profit level; it's only relevant if you're below the Small Profits Threshold and want to pay it voluntarily to protect your State Pension record.
As a limited company, the company itself pays Corporation Tax on its profit: 19% up to £50,000, tapering up through marginal relief, to 25% above £250,000. You then extract money as salary (which is deductible for the company but taxed as your income) and dividends, which have their own £500 tax-free allowance before being taxed at 10.75% basic rate, 35.75% higher rate, or 39.35% additional rate.
The general pattern is that incorporating tends to save tax once profits climb past a certain point, because company profit is taxed at 19-25% rather than up to 40%+ Income Tax and NI. But that saving only really shows up on profit you leave in the company. If you need to draw out most of what you earn to live on, you're paying Corporation Tax and then dividend tax on the same money, and the gap narrows, sometimes to nothing, once you factor in higher accountancy costs for running a company properly.
Liability: the other half of the decision
Tax gets most of the attention, but for a trade with real physical and financial risk, liability arguably matters more. As a sole trader, there's no legal wall between you and the business. If a client dispute, a defective work claim, or an unpaid supplier debt goes against the business and it can't cover it, your personal assets, including your home, are on the line. A limited company is a separate legal person: if the company can't pay a debt, the general rule is that your personal assets are protected.
That protection isn't absolute. Lenders and suppliers commonly ask directors of smaller companies for a personal guarantee on van finance, equipment leases or trade accounts, which puts you back on the hook for that specific debt regardless of the company structure. But for the broader risk of construction work itself, defects, accidents, disputes, incorporating genuinely changes your exposure.
What changes for CIS and admin
CIS deductions work the same way at 0%, 20% or 30% whichever structure you use, the rate depends on your registration status, not whether you're a sole trader or a company. What differs is how you get the money back. A sole trader reconciles CIS deductions suffered once a year through Self Assessment. A limited company can offset deductions suffered against its own monthly PAYE and National Insurance liabilities as an employer, and reclaim any balance left over at year-end, which is often quicker than waiting for a Self Assessment refund.
On admin, a limited company means an annual confirmation statement and statutory accounts filed at Companies House, both on the public record, alongside its own Corporation Tax return. A sole trader just files Self Assessment, which stays private. Some larger contractors also prefer dealing with limited company subcontractors for their own risk management, which can matter if you're chasing bigger contracts.
So which should you choose?
There's no single profit figure where the answer flips for everyone, it depends on how much you need to draw out to live on, how much risk your work actually carries, and whether you're planning to grow, bring in a business partner, or keep things as simple as possible. Our company formation and structuring service looks at your actual numbers rather than a generic rule of thumb, and handles the registration, CIS, VAT and PAYE set-up if incorporating turns out to be the right move.
Rehan Razzaq, FCCA
ACCA Chartered Certified and a Xero Certified Advisor, helping UK construction businesses with accounts, tax and financial planning.
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