New UK business owners usually face one major decision first: trade as a sole trader or register a limited company — that choice affects taxes, paperwork and personal risk. The choice shapes tax bills, paperwork, pensions, bank lending and your personal legal risk. I'll give you the key numbers, step-by-step actions and official links so you can start trading with fewer surprises; for example, Companies House charges are listed on its website.
Quick-reference summary
- A sole trader setup is straightforward, but you’re personally liable for business debts and you pay tax through Self Assessment. Make sure you register for Self Assessment soon after you start trading — check the exact HMRC deadline for the tax year you began, and don't miss it. See https://www.gov.uk/log-in-file-self-assessment-tax-return.
- A limited company is a distinct legal entity and usually limits shareholders' liability — you form it at Companies House, where fees and processes are listed on their site. File annual accounts and a confirmation statement (online £13). Set up at https://www.gov.uk/set-up-limited-company.
- VAT threshold: £85,000 taxable turnover in any 12-month period — mandatory registration at https://www.gov.uk/vat-registration-threshold.
- Corporation tax: company must register for Corporation Tax within three months of starting to trade. HMRC guidance: https://www.gov.uk/corporation-tax.
Key figures to keep handy (2026)
- Companies House incorporation fee: £12 online, £40 by post. Confirmation statement fee: £13 online, £40 by post. Source: Companies House services on gov.uk.
- VAT registration threshold: £85,000 turnover (taxable goods and services in any rolling 12 months).
- Self Assessment filing deadlines: paper returns by 31 October; online returns by 31 January (following the end of the tax year on 5 April).
- Corporation Tax registration: within three months of starting to trade as a company; the company must pay Corporation Tax on profits (main rate 25% was set in recent years for larger profits).
- Pensions: automatic enrolment requires minimum total contributions of 8% of qualifying earnings, with employers paying at least 3% of that amount.
Detailed breakdown: Sole trader vs Limited company
Honestly, sole trader — the basics
- Set-up: tell HMRC you’re self-employed by registering for Self Assessment. There's no Companies House registration. It's quick. Paperwork is lighter. But you’re personally responsible for any business debts — your home and personal savings are at risk.
- Tax and National Insurance: profits are taxed through Self Assessment. You’ll pay Income Tax and Class 2/4 National Insurance contributions if profits exceed relevant thresholds. File your tax return by 31 January each year and pay any tax owed then.
- Costs: minimal to start — you may only need bookkeeping software, a business bank account and insurance. VAT registration is necessary if turnover passes £85,000.
Limited company — the basics
- Set-up: incorporate at Companies House. Choose a company name, a registered office address in the UK, at least one director and one shareholder, a SIC code and prepare the articles of association (model articles are fine for most businesses). Register online for £12 or by post for £40: https://www.gov.uk/limited-company-formation.
- Tax and obligations: the company pays Corporation Tax on its profits. Directors pay Income Tax and NICs on salaries; shareholders pay tax on dividends. A company files annual accounts at Companies House and a Company Tax Return with HMRC; Companies House also requires an annual confirmation statement — check their site for the current fee.
- Liability and credibility: shareholders’ liability is limited to unpaid shares. Limited companies often look more credible to lenders and larger clients, but administration and compliance costs are higher.
How to apply / how to set up — step-by-step
Starting as a sole trader — 9 steps
- Decide your business name. You can trade under your own name or a business name. Check that name isn’t a trademark.
- Register for Self Assessment: use https://www.gov.uk/log-in-file-self-assessment-tax-return. Do this by 5 October after the end of the tax year in which you started trading.
- Open a business bank account — not legally required but strongly advised for clean records.
- Get basic bookkeeping in place right away — a spreadsheet or cloud tool will do, and if you register for VAT you'll need software that meets Making Tax Digital requirements.
- Check VAT rules. If your taxable turnover looks like it'll breach the VAT threshold within 12 months, you must register for VAT — find the current threshold and registration process on gov.uk.
- Get the right insurance: professional indemnity, public liability or employers’ liability if you hire staff.
- Record income and expenses. Keep receipts and bank statements for at least six years.
- Budget for tax: set aside roughly 20–30% of profits for Income Tax and NICs as a rule of thumb until you know your exact liability.
- File your Self Assessment return by 31 January online (or 31 October for paper returns) and pay any tax due on time to avoid penalties.
Incorporating a limited company — 11 steps
- Choose a company name and business structure — most small businesses choose a private company limited by shares.
- Check name availability at Companies House and check trademarks at https://www.gov.uk/search-for-trademark.
- Decide directors and shareholders, prepare a registered office address and choose a SIC code for your primary business activity.
- Prepare articles of association — the model articles on gov.uk work for most startups.
- Register (incorporate) with Companies House online (£12) or by post (£40): https://www.gov.uk/limited-company-formation. You'll receive a Certificate of Incorporation with company number and formation date.
- Register the company for Corporation Tax within three months of starting to trade: https://www.gov.uk/corporation-tax/register.
- Set up PAYE if you employ staff or pay yourself a salary; register as an employer with HMRC before the first payday.
- Open a company bank account — most banks require the Certificate of Incorporation and ID for directors.
- Keep statutory records: registers of members, directors, and meeting minutes. File annual accounts with Companies House and a Company Tax Return to HMRC.
- File a confirmation statement every 12 months (online fee £13) to confirm company information is up to date.
- Plan directors’ remuneration tax-efficiently. A common approach is to pay a modest salary up to the personal allowance (£12,570 in recent years) and take extra profit as dividends — but check current tax rules or get advice.
How to access official help and training
- Gov.uk has step-by-step pages: set up a limited company https://www.gov.uk/set-up-limited-company, and guidance for the self-employed https://www.gov.uk/set-up-business.
- ONS datasets can help you understand business demographics and sector size; search Business Demography and Business Population Estimates at https://www.ons.gov.uk/businessindustryandtrade.
- If you want training or a business course, UCAS lists undergraduate and postgraduate business and entrepreneurship courses — note UCAS deadlines (main deadline 15 January; earlier 15 October for Oxbridge, medicine and veterinary). See https://www.ucas.com.
Tips for first 12 months
- Keep separate personal and business finances. It makes tax returns and bank lending far easier.
- Get a simple invoicing and bookkeeping system running from day one. Cloud software saves time at tax return season.
- If you're unsure about your status — sole trader or company — get professional advice. An accountant can show whether the tax and limited liability benefits of a company outweigh the extra compliance costs for your turnover level.
- Build a cash buffer. Small businesses commonly face seasonal dips in cashflow. Aim for at least three months' running costs if possible.
Regional differences and local support
- Most rules (tax, Companies House, VAT) are UK-wide. But business support, grants and local rates differ by nation and council. Contact local councils for business rates relief schemes and check devolved government business pages: e.g. The Scottish Government business support site or Business Wales.
- Local enterprise partnerships, Growth Hubs and business centres offer free mentoring, workshops and subsidised training. Search your county’s Growth Hub online.
Common mistakes to avoid
- Don’t delay registering for Self Assessment or Corporation Tax — late registration triggers fines. Companies must register for Corporation Tax within three months of starting to trade.
- Don’t mix personal and business spending. It complicates your record-keeping and can look bad to lenders or HMRC.
- Don’t forget PAYE and auto-enrolment if you take on staff: register as an employer before the first payroll and set up pensions correctly.
- Don’t assume a company always saves tax. Once you add accountancy fees, payroll, filing costs and the administrative burden, a sole trader may be cheaper at low profit levels.
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If you’re starting in 2026, make a pragmatic choice. Trade as a sole trader for simplicity and low start-up cost; incorporate if you need limited liability or plan to scale. Register for Self Assessment by 5 October after the tax year you start trading, or incorporate at Companies House (£12 online) and register your company for Corporation Tax within three months — those are the deadlines that drive everything that follows.
This article was created with AI assistance.
