When It Makes Sense to Switch From Sole Trader To Limited Company in 2026

21st January 2026

Switching from sole trader to limited company is usually driven by profit level, risk, and future plans, rather than by how long you've been trading.

When profits become consistently higher.

A common trigger point is £40,000-£60,000+ in annual profits.

At this level:

Income tax and Class 4 NI as a sole trader rise sharply

A limited company may allow:

Lower overall tax through salary/dividend planning

Retention of profits inside the company at corporation tax rates

If profits fluctuate or are below this range, the benefits of incorporation are often limited.

When business risk increases

Switching makes sense if you:

Take on larger contracts

Employ staff

Hold stock or equipment

Face potential legal claims

A limited company offers limited liability, helping protect personal assets.

When you plan to grow or reinvest

Incorporation is often the right step if you intend to:

Reinvest profits rather than take them all as income

Bring in a business partner

Raise external finance

Build a business you may sell in the future

When clients expect a limited company

Some organisations:

Prefer dealing with limited companies

Require incorporation for procurement or contracting

However, contractors should still assess IR35 risk before switching.

When You Should Not Switch Yet

It may be better to stay a sole trader if:

Profits are low or unpredictable

You rely on one main client (IR35/employment risk)

You value simplicity and immediate access to cash

The business is still being tested

How to Switch: Step-by-Step (2026)

Switching is not automatic — you are effectively ending one business and starting another.

Step 1: Get professional advice

Before switching:

Ask an accountant to compare tax outcomes

Check IR35 exposure if you’re a contractor

Review VAT implications

This avoids costly mistakes later.

Step 2: Register your limited company

You must:

Choose a company name

Register with Companies House

Appoint at least one director

Issue shares (often 100% to you)

This can be done online and usually takes 24 hours.

Step 3: Register the company with HMRC

Once incorporated, register the company for:

Corporation Tax

PAYE (if paying yourself or staff)

VAT (if required or beneficial)

You must also set up:

A business bank account in the company’s name

Step 4: Transfer the business to the company

This is a critical step.

You may need to:

Transfer equipment, stock, or goodwill

Assign contracts to the company

Update client agreements and invoices

This can have tax consequences, particularly for:

Capital gains tax

VAT on asset transfers

Accountant support is strongly recommended.

Step 5: Inform clients and suppliers

You must:

Tell clients you are now trading through a limited company

Update:

Contracts

Invoicing details

Insurance policies

Payment terms

From this point on, all income should go to the company.

Step 6: Close or wind down sole trader activities

You must:

Submit a final Self Assessment return

Pay outstanding tax and NI

Deregister VAT if applicable

Your sole trader business effectively ends on the day the company takes over.

Timing the Switch Carefully
Best time to switch

At the start of a tax year (6 April)

Or after a natural break in trading

This simplifies tax reporting and avoids overlap.

Cash flow planning

Remember:

Company profits are taxed later (corporation tax)

Personal income depends on salary/dividends

You’ll need to plan for two tax systems during the transition year

Common Mistakes to Avoid

❌ Switching too early
❌ Ignoring IR35 risk
❌ Mixing personal and company finances
❌ Forgetting to transfer contracts properly
❌ Assuming incorporation always saves tax

Simple Example

Sole trader profit: £65,000

High income tax and NI

Little ability to retain profits

After incorporation:

Modest salary

Dividends as needed

Some profits retained at corporation tax rates

Result:

Better cash control

Lower personal tax

More admin — but better long-term structure

In 2026, switching from sole trader to limited company makes sense when a business reaches consistent profitability, rising risk, or growth ambitions. It should be a deliberate step, not an automatic one.

Handled properly, incorporation can be a powerful tool. Done too early or without advice, it can add cost and complexity with little benefit.