Whether you’re launching a consultancy, working as a fractional executive, or starting your freelance journey, one of the most important early decisions is how to structure your business. The route you choose , whether sole trader, limited company, or employment via an umbrella company, can significantly impact your take-home pay, legal responsibilities, tax efficiency, and long-term flexibility.
There’s no one-size-fits-all answer. But by understanding the key differences between these business structures, and factoring in your income level, client contracts, and long-term goals, you can make an informed decision that supports both financial health and business growth.
Option 1: Sole trader - Simple and efficient (especially under £60,000)
A sole trader is the simplest and most accessible way to start working for yourself. You operate as an individual rather than a company, and all business profits are treated as your personal income.
Pros:
- Quick to set up, minimal admin
- Full control over profits
- Tax-efficient at lower income levels
- Can claim allowable business expenses
Tax considerations:
As a sole trader, you’ll pay income tax and Class 4 National Insurance (NI) based on profits:
- 6% NI on profits between £12,570 and £50,270
- 2% on profits above £50,270
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Compared to being employed, this NI rate offers significant savings. However, you don’t receive statutory benefits like sick pay or parental leave. You’re also personally liable for any business debts or claims, which can pose risk without proper insurance.
Option 2: Limited company - More control and tax planning for higher earners
If your income exceeds £60,000 annually, or if your client has determined your contract to be outside IR35, then operating through a limited company can be the most financially beneficial route.
You become both a director and a shareholder, meaning the business is a separate legal entity — which provides liability protection and the ability to manage how and when you withdraw funds.
Pros:
- Greater tax planning flexibility
- Lower effective tax rate (with dividends + salary strategy)
- Personal assets protected (limited liability)
- Professional image and credibility
- Can retain profits within the company
Tax treatment:
You are taxed only on the money you take out, typically via a modest salary (subject to PAYE) and dividends (taxed at lower rates). You’ll also pay Corporation Tax on profits. As of 2025, Corporation Tax ranges from 19% to 25%, with the full 25% rate only applying to profits over £250,000.
Here’s a quick comparison:
| Profit band | Corporation tax rate |
|---|---|
| Up to £50,000 | 19% |
| £50,001 to £250,000 | Marginal relief applies (rate gradually increases) |
| over £250,000 | 25% |
This structure can also help avoid the 60% tax trap seen in PAYE for income between £100,000 and £125,140, where your personal allowance is gradually removed. With a limited company, you can keep personal income under these thresholds, deferring or reducing tax liability.
Caveats:
- Requires regular filings (Companies House, Corporation Tax, VAT if registered)
- You’ll likely need an accountant
- More admin, but worth it for the tax efficiency
Option 3: Umbrella company or direct employment - Simplicity, with fewer perks
If your client has assessed your role as inside IR35, you may need to be employed via an umbrella company or directly by the client.
This means you’ll pay PAYE tax and National Insurance like any other employee — but you’ll also lose some flexibility and may end up with a lower net income.
Pros:
- Easiest from an admin point of view
- Statutory benefits (e.g. sick pay, maternity/paternity)
- No need to manage your own tax filings
Cons:
- You’re taxed as an employee (including employer NI and apprenticeship levy)
- Take-home pay can be 40–60% of the agreed day rate
- You may still need insurance or professional certifications
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If you’re using this model, make sure your day rate reflects the tax deductions, or you could be earning significantly less than through a limited company or sole trader setup.
Other important considerations
Bonuses and incentives
Before leaving a permanent role to go self-employed, don’t forget to check the fine print on bonuses, shares, or other incentives. Leaving early could mean:
- Missing out on an annual bonus
- Losing vested share options
- Triggering repayment clauses for sign-on or retention bonuses
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Sometimes, the smartest financial move is to delay your exit until incentives crystallise, especially if the amount outweighs any short-term tax gains.
Exit timing and tax efficiency
If you’re in a permanent role earning over £100,000, exiting part-way through the tax year, before bonuses or promotions push you over certain thresholds — can help preserve your personal allowance.
Once you start your business, switching to a limited company gives you control over how and when you draw income, which can reduce your exposure to higher tax bands and keep your personal tax planning flexible.
Restrictive covenants
Finally, check your current employment contract for any restrictive covenants, such as:
- Non-compete clauses
- Client or employee poaching restrictions
- Delayed start periods
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These could impact how soon you can take on certain clients or projects once you leave.
Final thoughts
Choosing the right structure isn’t just about tax, it’s about aligning your business model with your goals, risk tolerance, and income potential.
- A sole trader model is great for getting started, especially under £60k.
- A limited company is often the best choice for higher earnings and long-term growth.
- Employment through an umbrella company is the least tax-efficient, but easiest for inside IR35 contracts or short-term gigs.
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Whatever you choose, timing matters, whether it’s tax thresholds, incentive payouts, or contract terms. Take the time to plan properly, and you’ll put yourself in a stronger position for success.
