Sole Trader or Limited Company? A Guide for Online Sellers

Short answer: for most small online sellers, sole trader is the better starting point. It’s simpler, cheaper to run, and in 2026 to 2027 it usually means less tax if you take all your profit out, because dividend tax rose in April 2026. A limited company makes sense when your profits are high and you can leave some of them in the company, when you want your personal assets protected, or when customers and suppliers expect a company. The VAT threshold is the same £90,000 either way.

This guide compares the two for UK sellers on Etsy, eBay, Amazon, Vinted, Shopify and WooCommerce. It covers tax (with worked numbers at three profit levels), liability, admin and running costs, how marketplace and payment accounts work for each, and the VAT questions people ask most. It’s general information, not advice: an accountant should make the final call with your real figures.

Sole trader or limited company: which suits you?

Your situation	Usually better	Why
Just starting, or profit under about £50,000	Sole trader	Less admin, lower costs and, in our examples, less tax
Profit over £50,000 and you spend all of it	Sole trader, or ask an accountant	Taking every pound out of a company costs more tax in 2026 to 2027
Profit over £50,000 and you can leave a good part of it in the business each year	Limited company	Profit left in a company is taxed at 19% to 26.5%, not 26% to 42%
You hold expensive stock, sign leases, or sell products that could injure someone	Limited company worth considering	Limited liability ring-fences business debts (insurance matters either way)
Wholesale buyers, retailers or suppliers want to deal with a company	Limited company	It can look more established and some will only trade with companies
You have a day job and sell on the side	Sole trader	Losses can be set against your salary, and admin stays light
You want to keep your name and details off a public register	Sole trader	Company directors are listed at Companies House

The main differences at a glance

	Sole trader	Limited company
Legal status	You and the business are the same person	The company is a separate legal person you own and run
Tax on profit	Income Tax and Class 4 National Insurance on all profit, whether you take it or not	Corporation Tax on company profit, then tax on what you take as salary or dividends
Liability	Unlimited: you’re personally responsible for business debts	Limited: your loss is usually limited to what you put in, unless you give personal guarantees
Setting up	Register for Self Assessment once you earn over £1,000	Register at Companies House (£100 online) and verify your identity
Yearly admin	One Self Assessment return	Annual accounts, Company Tax Return, confirmation statement, payroll, and often a personal return
Running costs	Low. Many sellers do their own return	Higher. Most companies pay an accountant
Taking money out	It’s all yours, any time	Only as salary, dividends, expense repayments or a director’s loan
Making Tax Digital	MTD for Income Tax applies above £50,000 now, £30,000 from 2027 and £20,000 from 2028	Not in MTD for Income Tax
VAT threshold	£90,000	£90,000
Privacy	No public register	Directors and owners are listed at Companies House

How sole traders are taxed in 2026 to 2027

As a sole trader you pay tax on your profit: sales minus allowable expenses. It doesn’t matter whether you leave the money in your business account or spend it. These are the 2026 to 2027 rates for England, Wales and Northern Ireland, from HMRC’s rates and allowances annex:

Tax	Band	Rate
Income Tax	Personal allowance, up to £12,570	0%
	Basic rate, £12,571 to £50,270	20%
	Higher rate, £50,271 to £125,140	40%
	Additional rate, over £125,140	45%
Class 4 National Insurance	Profits £12,570 to £50,270	6%
	Profits over £50,270	2%
Class 2 National Insurance	Profits of £7,105 or more	Nothing to pay. You get a National Insurance credit automatically
	Profits under £7,105	Optional: £3.65 a week to protect your State Pension record

The personal allowance shrinks by £1 for every £2 of income over £100,000. Scotland has its own Income Tax bands, but National Insurance is the same across the UK.

Your first £1,000 of trading income is covered by the trading allowance. Above that you must register for Self Assessment and file a return by 31 January after the tax year ends.

How limited companies are taxed in 2026 to 2027

A company pays Corporation Tax on its profit. You then pay personal tax on whatever you take out. Most owner-directors take a small salary plus dividends.

Tax	Band	Rate
Corporation Tax	Profits up to £50,000	19% (small profits rate)
	Profits £50,000 to £250,000	25%, reduced by marginal relief. Works out at 26.5% on each pound in this band
	Profits over £250,000	25%
Dividend tax	Dividend allowance	First £500 tax-free
	Basic rate band	10.75% (up from 8.75%)
	Higher rate band	35.75% (up from 33.75%)
	Additional rate band	39.35%
Employer National Insurance	Salary over £5,000 a year	15%
Employee National Insurance	Salary £12,570 to £50,270	8%

The dividend rises took effect on 6 April 2026, following the November 2025 Budget. The £50,000 and £250,000 Corporation Tax limits are shared between associated companies and cut for accounting periods shorter than 12 months.

Watch this date: the Autumn Budget 2026 is on 28 October 2026. These rates are current as of that date and the Budget could change rates for April 2027. We’ll update this page if it does.

Director’s salary: the usual approach

The common set-up for a one-person company is a salary of about £12,570, with the rest taken as dividends:

• No Income Tax or employee National Insurance on it, because £12,570 is both your personal allowance and the employee National Insurance threshold.
• It counts towards your State Pension, because it’s above the lower earnings limit (£129 a week, about £6,708 a year).
• It’s a business expense, so it reduces the company’s Corporation Tax.
• The catch: the company pays 15% employer National Insurance on the part above £5,000, which is £1,135.50 a year. A company whose only employee is its sole director can’t claim the Employment Allowance to cancel this out.

In our £20,000 profit example below, a £12,570 salary still beats a £5,000 one by about £460, because the extra salary saves more Corporation Tax than the employer National Insurance costs. Companies that can claim the Employment Allowance (for example with two directors on the payroll) often pay a little more. Your accountant will fine-tune this.

Tax compared at £20,000, £50,000 and £80,000 of profit

Here’s the total tax at three profit levels for 2026 to 2027. “Profit” means sales minus business costs, before paying yourself. Our assumptions:

• England, no other income, no student loan, no pension contributions
• Sole trader: Income Tax plus Class 4 National Insurance
• Limited company: £12,570 salary, employer National Insurance of £1,135.50, Corporation Tax on the rest, and all remaining profit paid out as dividends. Accountancy fees aren’t included

Profit before paying yourself	£20,000	£50,000	£80,000
Sole trader: Income Tax	£1,486	£7,486	£19,432
Sole trader: Class 4 NI	£446	£2,246	£2,857
Sole trader: total tax	£1,932	£9,732	£22,289
Sole trader: take-home	£18,068	£40,268	£57,711
Company: employer NI	£1,136	£1,136	£1,136
Company: Corporation Tax	£1,196	£6,896	£13,818
Company: dividend tax	£494	£3,107	£9,282
Company: total tax	£2,826	£11,138	£24,235
Company: take-home	£17,174	£38,862	£55,765
Difference	Sole trader £894 better	Sole trader £1,406 better	Sole trader £1,946 better

How the £50,000 company figures work: profit £50,000 − salary £12,570 − employer NI £1,135.50 = £36,294.50 company profit. Corporation Tax at 19% is £6,895.96, leaving £29,398.54 for dividends. The first £500 is tax-free, and the remaining £28,898.54 is taxed at 10.75% = £3,106.59.

Why the company doesn’t win when you take everything out

Add the layers together and each pound of profit paid out as a dividend is taxed more heavily than a sole trader’s profit:

Pound of profit taken out	Sole trader	Limited company (Corporation Tax, then dividend tax)
In the basic rate band	26% (20% + 6% NI)	About 27.7% (19%, then 10.75% of the rest)
In the higher rate band, company profit £50,000 to £250,000	42% (40% + 2% NI)	About 52.8% (26.5%, then 35.75% of the rest)

Online articles saying “go limited above £30,000 or £40,000” were mostly written when Corporation Tax was 19% for everyone and dividends were taxed at 7.5% and 32.5%. Those numbers no longer hold.

Where a limited company does save tax

The saving comes from profit you don’t take out. Profit left in the company is taxed at 19% (or 26.5% in the marginal band) and nothing more until you pay it out. A sole trader pays up to 42% on the same profit straight away. Companies can also pay employer pension contributions, which are a business expense with no National Insurance.

Worked example: a Shopify brand that keeps money in the business

Aisha runs a Shopify skincare brand from Manchester, with £80,000 of profit in 2026 to 2027. She needs about £46,000 a year to live on and wants to build up cash for a bigger stock order.

As a company, she takes a £12,570 salary and £37,700 of dividends, which keeps her income inside the basic rate band:

	Sole trader	Limited company
Employer NI	–	£1,136
Corporation Tax	–	£13,818
Income Tax and NI	£22,289	–
Dividend tax (£37,200 × 10.75%, after the £500 allowance)	–	£3,999
Tax paid this year	£22,289	£18,953
Cash in her hand	£57,711	£46,271
Cash kept in the company, already taxed at company level	–	£14,776

The company pays £3,336 less tax this year. The £14,776 left in the company will be taxed as a dividend when she takes it, but she can choose when, for example in a year when her income is lower. If she needs every pound personally, the company costs her more, as the main table shows.

Worked example: an Etsy seller with £20,000 of profit

Tom sells screen prints on Etsy from Norwich. His profit for 2026 to 2027 is £20,000. As a sole trader:

• Income Tax: (£20,000 − £12,570) × 20% = £1,486
• Class 4 NI: £7,430 × 6% = £445.80
• Total: £1,931.80. He keeps £18,068

Through a company he’d pay £2,825.80 in tax and keep £17,174, then pay an accountant on top. Staying a sole trader saves Tom close to £900 in tax, plus the cost of company accounts. His profits are also above £7,105, so he gets a National Insurance credit towards his State Pension without paying Class 2.

Liability: what’s actually protected

As a sole trader, you have unlimited liability. If the business owes money it can’t pay, such as a supplier bill, a refund claim or a court award, creditors can come after your personal savings and assets.

A limited company is a separate legal person. Its debts are its own, so your risk is usually limited to the money you’ve put in. In practice:

• Banks and landlords often ask directors for personal guarantees, which put you back on the hook for those debts.
• Directors can be personally liable for things like trading while knowingly insolvent, or for unpaid tax in some cases of misconduct.
• Product liability and public liability insurance matter either way, especially for cosmetics, candles, toys and food.

Admin and costs

What a sole trader has to do

1. Register for Self Assessment once your trading income goes over £1,000 in a tax year. The deadline is 5 October after the end of that tax year.
2. Keep records of sales and expenses.
3. File a Self Assessment return by 31 January and pay any tax due (with payments on account if your bill is over £1,000).
4. Use MTD for Income Tax once your qualifying income passes the threshold: £50,000 now, £30,000 from April 2027 and £20,000 from April 2028. That means quarterly updates through software.

What a limited company adds

Task	When	Cost or penalty to know
Register the company at Companies House	Before it starts trading	£100 online (Companies House fees)
Verify your identity with Companies House	Before you become a director, or with your next confirmation statement if you already are	Free through GOV.UK One Login (gov.uk)
Confirmation statement	At least once every 12 months	£50 online
Annual accounts to Companies House	9 months after your year end (21 months after registration for the first accounts)	Automatic late-filing penalties
Pay Corporation Tax	9 months and 1 day after the end of the accounting period	Interest if late
Company Tax Return (CT600)	12 months after the end of the accounting period	Penalties if late
Run payroll (PAYE) for your salary	Every time you pay yourself, with real-time reports to HMRC	Penalties for late reports
Personal Self Assessment	If your dividends are over £10,000 or you have other untaxed income	Same 31 January deadline
Keep company records	For 6 years from the end of the financial year	Up to £3,000 fine for not keeping them

You also need a separate business bank account in the company’s name, and the company’s money isn’t yours to dip into. Taking money out other than as salary, dividends or repaid expenses creates a director’s loan, which has its own tax rules. Most companies pay an accountant to prepare accounts and returns, so budget for that when you compare.

Marketplaces, Stripe and PayPal for each structure

Platform	As a sole trader	As a limited company
Etsy	Choose “individual or sole proprietorship” when setting up Etsy Payments	Choose “incorporated business” and give the company name, registration number and owners with 25% or more (Etsy help)
Amazon	Register with your own details	Register with the company’s details and documents. Switching an existing account goes through Amazon’s legal-entity change and re-verification, which can take time
eBay	Use a business account in your own or trading name	Use a business account in the company’s name
Vinted	Anyone selling to make a profit must use a free Vinted Pro account, giving their National Insurance number (Vinted help)	Vinted Pro in the company’s name, with its registration number
Stripe	Business type: individual or sole trader	Business type: company. You can change it in your Stripe settings, and Stripe may ask for company documents (Stripe support)
PayPal	A personal or business account in your name	A business account in the company’s name, linked to the company bank account

Practical points for sellers:

• Payouts must go to the right bank account. Once you trade as a company, sales income belongs to the company, so payouts should go to the company bank account, not your personal one.
• Set up the company bank account first before changing any marketplace details, because most platforms check the account name matches the business.
• Platforms report your sales to HMRC under the digital platform reporting rules, and the details they report differ for individuals and companies. Keep the seller details accurate.
• Don’t list as a private seller if you’re trading. Etsy and others treat that as misleading buyers, and it breaks consumer law.

Do sole traders and limited companies have different VAT thresholds?

No. The VAT threshold is £90,000 for both. You must register once your taxable turnover goes over £90,000 in a rolling 12 months, or you expect it to go over £90,000 in the next 30 days alone (VAT Notice 700/1). The VAT threshold guide explains both tests in detail.

Question	Sole trader	Limited company
What is the VAT threshold?	£90,000 taxable turnover	£90,000 taxable turnover
Is it turnover or profit?	Turnover	Turnover
Whose turnover counts?	Everything you sell as a sole trader, across all your businesses	The company’s sales only
Must you register below £90,000?	No, it’s optional	No, it’s optional
Do you charge VAT if not registered?	No, never	No, never

Does a sole trader need to be VAT registered?

Only above £90,000. A sole trader doesn’t need to be VAT registered just because they’re in business, and they mustn’t charge VAT or show it on invoices until they are. Once you go over, you have 30 days from the end of that month to register for VAT. HMRC then gives you a VAT number. You don’t need one before that: your Self Assessment Unique Taxpayer Reference is a different number.

One trap: VAT registration belongs to you, not to each business you run. If you sell candles on Etsy and also do freelance photography as a sole trader, both count towards one £90,000 total. Once registered, you charge VAT on both.

Do limited companies need to be VAT registered?

No, not automatically. A company with £40,000 of sales doesn’t have to register, just like a sole trader. A company’s threshold only counts the company’s sales, so a sole trader business and a company run by the same person are tested separately. But HMRC can treat them as one if they’re really a single business split up to stay under £90,000. VAT Notice 700/1 covers this “artificial separation”. Setting up a company purely to dodge VAT doesn’t work.

Voluntary registration

Either structure can register voluntarily below £90,000. It usually pays if most of your customers are VAT-registered businesses, and usually doesn’t if you sell to the public, because your prices go up 20% or your margin falls. See voluntary registration.

Switching from sole trader to limited company

Plenty of sellers start as sole traders and incorporate once profits grow. The usual steps:

1. Talk to an accountant about timing. Moving stock, equipment and goodwill into a company has tax effects, and the best date depends on your year end.
2. Set up the company at Companies House and verify your identity.
3. Open a company bank account.
4. Move your marketplace, Stripe and PayPal accounts to the company, as described above.
5. Close your sole trader business for Self Assessment, and file a final return.
6. Sort out VAT. If you’re VAT registered, you can apply to keep your VAT number by transferring the registration to the company using form VAT68. Otherwise the company registers in its own right if its sales go over £90,000.

GoodVat for sole traders and companies

Whichever structure you choose, the VAT rules are the same, and so is the risk of missing the £90,000 threshold. GoodVat handles the VAT side for both:

• Monitors your rolling 12-month turnover across Shopify, WooCommerce, Amazon, Etsy, Stripe and PayPal, and alerts you before you reach £90,000. eBay is coming soon, and we can work from your exports for other platforms
• Registers you for VAT with HMRC, or helps move your registration when you incorporate
• Calculates the right VAT on every sale and sends compliant invoices
• Files your Making Tax Digital for VAT returns, and syncs with Xero, QuickBooks, Sage and Zoho Books

We don’t file Self Assessment or Company Tax Returns, run payroll, or advise on which structure to choose. That’s a job for your accountant.

Growing fast, sole trader or Ltd?

Tell us where you sell and roughly what you turn over. We’ll show you how close you are to the £90,000 VAT threshold, what registering would mean for your prices, and take care of registration and VAT returns when you need them, whichever structure you trade through.

Ask a tax expertor email hello@goodvat.com

A real person replies within one business day

FAQ

Is it better to be a sole trader or a limited company?

For most small online sellers, a sole trader is simpler and cheaper to run, and in 2026 to 2027 it usually costs less tax if you take all your profit out of the business. A limited company starts to pay off when profits are high and you can leave some money in the company, when you want limited liability, or when bigger customers or suppliers expect to deal with a company.

What is the VAT threshold for a sole trader?

The same as for any UK business: £90,000 of taxable turnover in a rolling 12 months, or £90,000 expected in the next 30 days alone. It’s based on sales, not profit, and covers all the business activities you run as a sole trader added together.

Does a sole trader need to be VAT registered?

Only once their taxable turnover goes over £90,000 in a rolling 12 months, or they expect it to in the next 30 days. Below that, registration is optional. You then have 30 days from the end of the month you went over to tell HMRC.

Do limited companies need to be VAT registered?

No, not automatically. A limited company follows the same £90,000 threshold as a sole trader. Being a company doesn’t make VAT registration compulsory, though some companies register voluntarily because they sell to other businesses or want to reclaim VAT on costs.

Do I need to charge VAT as a sole trader?

Only if you’re VAT registered. A sole trader who isn’t registered must not charge VAT or show it on invoices. Once registered, you charge VAT on all your taxable sales, usually at 20%, and pay it to HMRC through Making Tax Digital for VAT returns.

Do I need a VAT number as a sole trader?

Not unless you’re registered for VAT. You get a VAT number when HMRC registers you, which happens when you go over the £90,000 threshold or register voluntarily. Your Unique Taxpayer Reference for Self Assessment is a different number.

Is a limited company more tax efficient in 2026?

Less than it used to be. With dividend tax at 10.75% and 35.75% from April 2026, Corporation Tax at 19% to 25%, and employer National Insurance at 15%, our examples show a sole trader paying less tax at £20,000, £50,000 and £80,000 of profit when everything is taken out. A company saves tax mainly on profit you leave in the business or pay into a pension.

Can I switch from sole trader to limited company later?

Yes, and many sellers do once profits grow. You set up the company, move the business into it, open a company bank account and update your marketplace and payment accounts. If you’re VAT registered you can apply to transfer your VAT number to the company using form VAT68. Get an accountant to help with the timing.

Related guides

• VAT threshold 2026: the £90,000 test for sole traders and companies alike
• MTD for Income Tax: quarterly reporting for sole traders from April 2026
• How to register for VAT: step by step, for either structure
• Allowable expenses for online sellers: what you can deduct before working out profit
• The £1,000 trading allowance: when you don’t need to register at all
• Amazon seller tax and VAT checklist: what UK Amazon sellers need to set up
• UK VAT setup checklist: what to do once you’ve crossed £90,000