Sole trader vs limited company

A generic note for a single person invoicing UK client work: when to stay a sole trader, when a limited company is worth it, and how to form one if you need it. Figures are UK, as at September 2026.

Short version

For a short, low-risk client invoice (weeks or a few months, ordinary day-rate, contract liability capped or unremarkable), stay sole trader. A payable identity takes days: Mettle + FreeAgent.

Do not form or revive a limited company only because a company name already sits on the register, or only to wrap a short piece you will spend anyway. A Ltd is for limited liability, retaining profit, staggering drawings, and for agencies that will not pay a sole trader.

If the first contract puts personal assets on the line (uncapped indemnities, data / IP warranties, work that can cause loss bigger than your insurance), forming a Ltd for that contract can be the point, even if the gig is short. Read the contract before you decide.

If an outside IR35 agency later needs a company number, form (or cleanly revive) then. Do not incorporate on speculation with no contract in hand.

This note assumes one person doing the work: one working director, no staff, no second invoice book. If you are married or in a civil partnership, a spouse can hold shares without turning this into a two-person practice (see Spouse shares).

Two jobs people mix up

Mettle does not form companies. FreeAgent does not file your confirmation statement. Accountant-in-a-box products (Crunch, Sleek) try to sell both plus payroll as a monthly bundle. For a short bridge that is usually more than you need.

Which vehicle for which work

IR35 is a rule about intermediaries (usually personal service companies). Sole traders sit outside that specific rule, but the client can still treat the relationship as employment. Direct B2B is a different chain from an agency contractor seat.

Sole trader vs Ltd

Sole trader in one line: invoice, money hits Mettle, it is earnings now, FreeAgent does the return.

Ltd in one line: the company is the legal person. It earns, pays corporation tax, and you take dividends when you want cash. Useful if you will retain surplus, or if you need a liability ring-fence for the first contract. Extra admin if you form it only to spend every pound anyway and the contract risk is small.

Corporation tax (broad bands): 19% on small profits (to about £50k), 25% above £250k, marginal rate between. Dividend tax from 6 April 2026: 10.75% basic, 35.75% higher, 39.35% additional, plus a £500 dividend allowance each person who actually receives dividends. Personal Allowance is £12,570 each (tapers over £100k personal income).

A dividends-only Ltd (sole director, no salary, no staff) avoids PAYE and workplace auto-enrolment. Trade-off: unused Personal Allowance and no employment NI credits that year. Fine for a short bridge; a mortgage underwriter later prefers PAYE.

Take-home calculator

Use GoForma’s sole trader vs limited company calculator (2026/27 rates) to compare take-home on your turnover and expenses. It is a third-party tool, not ours, and not tax advice.

That calculator usually assumes an optimised director salary plus dividends, and that you extract the year’s profit. This note’s working Ltd is often dividends only (no payroll). Treat the result as a steer. If you want numbers run on FreeAgent books, Anderson Accounting can do that.

Limited liability (why a first contract can justify a Ltd)

A sole trader is the business. If a client sues on the contract, or a third party has a claim that insurance does not cover, the claim can reach personal savings and, in a serious case, the house.

A limited company is a separate legal person. If the company signed the contract, ordinary contract debts and many claims stop at company money and the company’s insurance. That is the main non-tax reason to incorporate before an initial contract, not after you have already signed as yourself.

It matters more on a first MSA than on a later one: you have less bargaining power, the template is often written for the client, and a single bad project can exceed a short gig’s fees.

Insurance is still the first line. Professional indemnity (and public liability if they ask) is what actually pays most professional-negligence and “your work caused loss” claims, whether you are a sole trader or a Ltd. Forming a company does not replace a PI policy. Buy the cover in the same name as the contracting party, to the limit they write into the schedule.

A Ltd does not ring-fence you if:

• You sign a personal guarantee, or the contract names you personally as well as the company.
• The claim is your own fraud, or a personal duty you owe outside the company (some negligence / misrepresentation still attaches to the individual).
• You are a director and you trade while insolvent, or you siphon money out to defeat creditors (wrongful / fraudulent trading).
• You have already taken the surplus as dividends, so the company is an empty shell: the ring-fence still stops most personal claims, but there is nothing left in the company to settle a commercial dispute quickly.
• The work is inside IR35 or you are treated as an employee: status and PAYE are a different problem.

Read the contract before you incorporate (or before you stay sole trader). Look for: liability cap (fees vs unlimited), consequential / indirect loss, data-protection and IP indemnities, and any personal guarantee or “you and the company jointly”. A cap at fees or at the PI limit, with the company as the only supplier, is usually enough to stay sole trader on a short, ordinary invoice. Uncapped “all losses” plus a data or IP indemnity is the case for forming the Ltd first, then signing.

Do not sign as a sole trader “for now” and novate later. The first signature is the one that counts.

Spouse shares (married or civil partners)

Anyone can legally own shares. Working in the company is about salary, not ownership. What marriage or civil partnership changes is the tax treatment of a gift of ordinary shares (the Arctic Systems / Jones v Garnett line, and ITTOIA s626). That route is spouses and civil partners only.

If you form a Ltd and you are married or civil partners:

• You can issue ordinary shares with the same rights to your spouse from day one, or gift some of yours later. Get an accountant to paper it. Equal ordinary shares are the structure the cases protect. Do not invent a special class of share whose only job is to siphon dividends to the lower earner.
• Dividends follow shareholding, not who billed. If they hold 50%, they are entitled to 50% of a dividend declared on that class. That is how unused Personal Allowance and their £500 dividend allowance become usable.
• Rough scale, not a quote: if they have little other income and you would otherwise take the same money as a higher-rate dividend (35.75% from 6 April 2026), parking about a Personal Allowance’s worth of dividends with them is on the order of a few thousand pounds a year. An accountant should run the household numbers. It is not worth the extra PSC / IDV / paperwork if the company will only exist for one short gig and you will extract everything to live.
• They can be a director with no shares (second signatory) without splitting income. They can be a shareholder and not a director. Identity verification applies before appointment as director or PSC (generally 25%+).
• They do not need a made-up “secretary” job to hold shares. Small companies do not need a statutory company secretary.
• A real admin job is a PAYE salary at a commercial rate for the hours (National Living Wage £12.71/hour from April 2026; £12,570 ≈ 19 hours/week at that rate). That is payroll, employer NI (15% above £5,000), employers’ liability, and auto-enrolment if they earn over £10,000 and are 22 to state pension age. It is not a tax-free partner allowance. Skip it unless the hours are real.
• Marriage Allowance (about £252/year) is married / civil partners only. It usually fails if the higher earner is a higher-rate taxpayer. Do not confuse it with shareholding.
• Paying household bills from your drawings is not their income. Their unused Personal Allowance is used by their salary, dividends, interest, or their own freelance, not by you paying the mortgage.
• Do not invoice their clients from this Ltd, and do not pay their sole trader from the Ltd, unless an accountant has structured a genuine commercial subcontract. That is a different book.

Mettle’s Ltd product allows up to two owners (PSCs), all individuals, and only one login. A spouse shareholder who is a PSC still fits that box; they will not get their own app access.

This is still one person’s contracting vehicle with a household share split. It is not a two-freelancer company and not a reason to form a Ltd if you were otherwise staying sole trader on a simple invoice.

Stack that works (trading)

1. Mettle business current account (NatWest, not Starling). FreeAgent stays free if the linked Mettle account transacts at least once a month. Marketing copy says one Mettle account per person; confirm in-app before counting on a second Mettle for a Ltd. If they will not open a second, use another Ltd bank and keep FreeAgent on that account (FreeAgent’s free-with-Mettle deal applies to the Mettle account only).
2. FreeAgent for invoices, expenses, and the Self Assessment (or Ltd accounts if you later add a company). Default while Mettle is the bank. See Accounting packages if an accountant already lives in Xero.
3. Professional indemnity / public liability. A combined contractor pack last priced around £300/year. Buy to the limit the client writes into the schedule (often £1m or £2m PI).

If a Ltd is ever needed and you already have a sole-trader stack: a second bank (Mettle Ltd only if they will open it; otherwise another provider) and a second set of books (second FreeAgent, or one Xero organisation per legal person). Do not VAT-register the sole trader just because the Ltd is VAT-registered. Do not run both books through one account.

Accounting packages

You need one digital book per legal person: invoices, bank feed, expenses, then Self Assessment (sole trader) or accounts + corporation tax (Ltd). Making Tax Digital for VAT and for Income Tax both require HMRC-recognised software. Do not invoice from the bank app and from Xero / FreeAgent for the same work. Pick one source of invoices.

FreeAgent (default with Mettle)

Built for UK sole traders and small companies. Self Assessment and Ltd year-end live in the same product. MTD for Income Tax and VAT are native. Standalone price (as at mid-2026, excl. VAT): about £19/month sole trader, £33/month limited company. Free with Mettle if that Mettle account transacts at least once a month (same bundle on NatWest / RBS / Ulster Bank business current accounts).

Use this if you are happy to do your own books and you bank with Mettle. It is enough for a single-person contractor: invoices, tax estimate, VAT return if you register, a few dividends.

Xero

The package most UK accountants already open every morning. A general ledger with a large app store (receipt capture, cash-flow, payroll, project time). Mettle can feed Xero; you still pay Xero. FreeAgent-with-Mettle does not make Xero free.

UK list prices from 1 September 2025 (excl. VAT; check xero.com/uk): Simple £7, Ignite £16, Grow £37, Comprehensive £50, Ultimate £65. Simple and Ignite cap how many invoices you can send. Grow is the usual small-company plan. Payroll is an add-on. Hubdoc receipt capture is included on current plans while connected.

Choose Xero if:

• Your accountant already works in it (this is the usual reason).
• You expect VAT, more than a handful of invoices, or you will add staff later.
• You want the wider integration market (Dext, Float, and so on).

Stay off Xero for a short first contract if FreeAgent is already free and you have no accountant insisting. Switching FreeAgent to Xero later is possible but messy; start on Xero only when you already know you will need it.

Xero does not replace company secretarial work (confirmation statement, registers). It does not form the company.

QuickBooks (Intuit)

The cheapest paid MTD path if you do not have the Mettle / NatWest FreeAgent bundle. Sole Trader Plus is about £10/month + VAT for a non-VAT sole trader; Simple Start is about £16/month + VAT once VAT is in play. Ltd plans sit in the mid-£30s. Mettle can feed QuickBooks too.

Fine mobile app. Fewer UK accountants live in it than in Xero. Use it if you are paying your own way and want the lowest MTD subscription, not because it is a better contractor tool than FreeAgent.

Sage

Common where an older practice still runs the books. Heavier than a one-person contractor needs. Bank feeds are patchier on Mettle than FreeAgent / Xero; some people pick Tide if Sage is non-negotiable. Do not start here unless the accountant requires it.

An accountant (FreeAgent-friendly)

If you want a human on the year-end rather than an app-only box, use someone who already works in the books you keep. For previous limited companies the practice used Anderson Accounting (anderson-accounting.co.uk). They are FreeAgent-friendly, so you can stay on Mettle + FreeAgent and hand them the file for accounts and corporation tax, instead of moving to Xero or a Crunch / Sleek bundle.

That is a named practice, not a referral scheme. Confirm they still take on contractor / small Ltd work, and that the fee still makes sense for a short first contract.

Accountant-in-a-box (Crunch, Sleek, and similar)

These replace FreeAgent / Xero with a monthly accountant + payroll bundle (often £60–90/month). Useful if you want them to run PAYE. Extra cost if you already have books you like. See Forming and managing the company.

Practical pick

Two legal persons (existing sole trader plus a new Ltd) means two subscriptions or two FreeAgent organisations. Do not merge the feeds.

If a company already exists

Having a company on the register is not the same as being ready to invoice.

Before you put a new client through it:

• Is it up to date (accounts, confirmation statement), or late / struck off / in the process of being struck off?
• Whose name is on the bank, the insurance, and the VAT number (if any)?
• Would the client’s SDS / agency onboarding accept this company, or do they want a clean personal service company formed for this seat?
• Identity verification (below) still applies to new director or PSC appointments.

A dusty company with old filings can cost more to rescue than forming a new one. An accountant or formation agent can tell you which is cleaner. Do not assume an existing Ltd is the right vehicle for a short invoice.

What a Ltd actually needs (beyond the certificate)

• Identity verification before you can be appointed director or PSC: GOV.UK One Login, or an authorised agent (ACSP). Required since 18 November 2025.
• Registered office (public). Use a mail-forwarding / formation-agent address if you do not want a home address on the register. Service address for the director can be separate.
• Ltd bank (Mettle Ltd or equivalent) and Ltd books (second FreeAgent, or a Xero organisation in the company’s name).
• PAYE only if you take a salary. Not required for dividends-only, sole director, no staff.
• Accounts, CT600, confirmation statement, every year, even after the contract ends, until you close the company.
• Companies House fees from 1 February 2026: £100 digital incorporate, £50/year confirmation statement, £13 to strike off.

Insurance (Ltd name)

Buy a contractor pack matching the PI limit they name. Skip employers’ liability while you remain the only person in the company, unless the contract demands the certificate.

VAT and Making Tax Digital

• VAT registration is required if taxable turnover in a rolling 12 months goes over £90,000, or if you expect to go over £90,000 in the next 30 days alone. Under that, registration is voluntary.
• Rough check: £500/day × 3 months ≈ £32.5k; × 6 months ≈ £65k. A short gig on its own is usually under. Pile-on with other billed work can tip you over.
• Agencies often want VAT invoices even when you are under the threshold. That is a reason to register the Ltd voluntarily, not a reason to register a small sole-trader practice.
• Making Tax Digital for Income Tax: mandated from April 2026 if 2024/25 sole-trader + property turnover was over £50k. FreeAgent already supports MTD. If last year’s sole-trader turnover was well under that, you are not in the first wave, but in-year digital records are still the direction of travel.

Forming and then managing the company

If someone needs a company number, or you are forming the Ltd so the company can sign a high-liability first contract.

Recommended: keep FreeAgent, add a formation / portal

1st Formations (or similar) Online Company Manager

• Forms the company and then gives you a dashboard: confirmation statement, registered office, service address, mail.
• Privacy package in the region of £118 all-in (includes the £100 Companies House fee). Registered-office renew about £39 + VAT/year.
• Can act as ACSP for the identity check if you do not want to do One Login yourself.

Inform Direct

• Stronger on statutory registers, share certificates, and dividend paperwork.
• Complements FreeAgent; it does not replace it. Worth it if a spouse will hold shares and you want tidy share certificates and dividend minutes.

Companies House direct

• £100 to incorporate. Cheapest cash out.
• Your home address is public unless you buy a third-party registered office separately.
• You still need a bank, books, and a way to remember the confirmation statement.

Skip for a three-to-six-month bridge

Crunch, Sleek, and similar (£60–90/month) replace FreeAgent with an accountant + payroll bundle. Fine if you want them to run PAYE. Extra cost and a second bookkeeping home if you already like FreeAgent.

Practical sequence when an agency needs a number

1. Ask the questions in the last section (IR35, pay a company not an umbrella, PI, VAT, terms).
2. One Login or ACSP identity check (both of you if the spouse will be a director or PSC).
3. 1st Formations Privacy package, or Inform Direct if you want the registers portal.
4. Ltd bank + Ltd FreeAgent (keep any existing sole-trader pair separate). Confirm Mettle will open a second account; if not, use another Ltd bank.
5. PI/PL in the Ltd name, to the limit they named.
6. The company signs and invoices. Do not sign the same work as a sole trader.

If an old personal service company already exists, check whether it is still clean before forming a new one.

Ask the client or recruiter before forming anything

1. Inside or outside IR35, and who issued the SDS?
2. Will you pay a limited company, not an umbrella? If only umbrella, treat it as inside.
3. Required PI cover, and whose name is on the policy?
4. VAT invoices required?
5. Payment terms (7 / 14 / 30 days) and who the fee-payer is?
6. Liability: is there a cap, and is it fees / PI limit or unlimited? Any data, IP, or “all losses” indemnity? Any personal guarantee?

If the answers are “direct B2B, pay my invoice, no SDS,” and the liability clauses are ordinary (capped, no personal guarantee), stay sole trader. If the first contract is uncapped or personally guaranteed, form the Ltd and have the company sign.

Sources (as at September 2026)

• GOV.UK: VAT registration threshold; MTD for Income Tax; Companies House fees (from 1 Feb 2026); director identity verification (from 18 Nov 2025); employers’ liability exemptions.
• HMRC: corporation tax bands; dividend tax rates from 6 April 2026; Personal Allowance.
• Pensions Regulator: auto-enrolment duties for a sole director with no staff.
• Agency / IR35: SDS and Section 44 are why most agencies will not pay a sole trader.
• Product pages: Mettle + FreeAgent (free while Mettle transacts monthly); Mettle marketing: one account per person (confirm in-app for a second business). Mettle can also feed Xero and QuickBooks (you still pay those). 1st Formations Online Company Manager; Inform Direct.
• Accounting: FreeAgent standalone about £19 ST / £33 Ltd (mid-2026, excl. VAT); Xero UK from 1 Sep 2025 Simple £7 / Ignite £16 / Grow £37 (excl. VAT); QuickBooks Sole Trader Plus about £10 + VAT. All three HMRC-recognised for MTD VAT and MTD Income Tax. Check live prices before you subscribe. Accountant used for previous Ltds: Anderson Accounting (FreeAgent-friendly).
• Limited liability: company as separate legal person; PI still required; personal guarantees and director misconduct sit outside the ring-fence.
• Spouse shares: Arctic Systems / Jones v Garnett; ITTOIA s626 (spouses / civil partners, ordinary shares); Marriage Allowance; National Living Wage from April 2026; Pensions Regulator auto-enrolment if a spouse is actually employed.