How to Start a Business in the UK: Sole Trader or Limited Company

Starting a business in the UK is mostly registration and record keeping, and the order matters. The first decision, sole trader or limited company, shapes everything after it: how you register, how you are taxed, what you file and what becomes public.

Should I be a sole trader or a limited company?

A sole trader is you, trading under your own name or a business name. There is no separate legal person, so the profits are yours and so are the debts, without limit. Setting up is quick and the paperwork is light.

A limited company is a separate legal person that you own through shares and run as a director. Its debts are generally its own, which protects your personal assets, although lenders often ask directors for personal guarantees. The price is more administration: annual accounts and a confirmation statement at Companies House, a company tax return, a payroll if you pay yourself a salary, and your details on a public register.

How do I register a business with HMRC and Companies House?

As a sole trader you register for Self Assessment with HMRC. The deadline is 5 October after the end of the tax year in which you started, so someone who starts trading in June has until 5 October of the following year.

A company is incorporated at Companies House. The fee is £100 online, double the £50 it cost before 1 February 2026. You need at least one director who is an individual aged 16 or over, at least one shareholder (who can be the same person), a UK registered office address that is not a PO box, a registered email address, a SIC code describing the business, and a memorandum and articles of association. Since 18 November 2025, identity verification has been a compulsory part of forming a company for new directors and people with significant control.

Next, the company registers for Corporation Tax within 3 months of starting to do business; most people can do this at the same time as incorporating. If the company will pay you a salary, it normally registers as an employer for PAYE before the first payday, even if you are the only person on the payroll.

What tax does a sole trader or limited company pay?

A sole trader pays income tax on the profit, together with any other income, above the personal allowance of £12,570, at 20%, 40% and 45% (Scottish taxpayers pay Scottish rates on earnings and trading profits). On top comes Class 4 National Insurance: 6% on profits between £12,570 and £50,270, and 2% above that. Class 2 contributions stopped being compulsory on 6 April 2024. Tax is due on the whole profit, whether you take the money out or leave it in the business.

A company pays corporation tax: 19% (the small profits rate) where profits are £50,000 or less, 25% (the main rate) above £250,000, and the main rate reduced by marginal relief in between, so the effective rate climbs from 19% to 25%. The limits are divided by one plus the number of associated companies, and cut for accounting periods shorter than 12 months.

A director then pays personal tax on what they take out. A salary goes through PAYE with income tax and National Insurance, and the company pays employer National Insurance at 15% on salary above £5,000 a year, but salary is deductible for corporation tax. Dividends come from profits left after corporation tax, so they are not deductible. The first £500 of dividends is tax-free, then the rates are 10.75%, 35.75% and 39.35% depending on your band; the ordinary and upper rates each rose by two percentage points on 6 April 2026.

When do I need to register for VAT?

You must register when your VAT-taxable turnover for the last 12 months goes over £90,000 (within 30 days of the end of the month in which it did), or as soon as you expect to go over it in the next 30 days alone. It is a rolling 12 months, not a tax year, and the threshold has been £90,000 since 1 April 2024. You can register voluntarily below it. VAT returns are filed through Making Tax Digital software.

What else needs to be in place before I start trading?

• Making Tax Digital for Income Tax: since 6 April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and send HMRC quarterly updates. The threshold falls to £30,000 from April 2027 and £20,000 from April 2028.
• A business bank account: sole traders are not legally required to have one, though it makes records far easier. A company's money is its own, so it needs an account in the company's name.
• Records: every sale, cost and receipt needs a record from day one. Sole traders keep records for at least 5 years after the 31 January filing deadline, companies for 6 years from the end of the financial year they relate to.
• Insurance: employers' liability insurance is compulsory once you employ anyone, with at least £5 million of cover (a company whose only employee owns at least half its shares is exempt). Public liability and professional indemnity cover are mostly optional in law, but clients often ask for them.
• Licences: some trades need a licence or registration. A food business, for example, must register with its local council at least 28 days before it starts trading.

In practice the order runs: choose the structure, register (with HMRC, or with Companies House and then HMRC), open the bank account, set up bookkeeping, arrange insurance and any licences, then watch the VAT and Making Tax Digital thresholds as the business grows. CoreFi reads your bank accounts and shows the tax figures as the year goes on.

Which structure suits you depends on your profits, plans and appetite for paperwork, and an accountant can advise on your own circumstances.