What is a sole trader?

A sole trader is the simplest business structure in the UK. You and the business are legally one and the same — you keep all profits but are personally liable for all debts. You register for Self Assessment with HMRC and file an annual tax return. There are no annual accounts to file at Companies House.

What is a limited company?

A limited company (Ltd) is a separate legal entity. It has its own accounts, pays Corporation Tax, and files at Companies House annually. As a director-shareholder, you typically draw a modest salary (often just below the Secondary NIC threshold) and extract the remainder as dividends — which attract lower tax rates and no NICs.

The core tax difference

Sole traders pay Income Tax at 20%, 40%, or 45% on all their profits, plus Class 4 National Insurance (9% on profits between £12,570 and £50,270, then 2% above). A limited company pays Corporation Tax at 19% (on profits under £50,000) or 25% (profits over £250,000), with a marginal relief taper in between. Director-shareholders then pay dividend tax at 8.75% (basic), 33.75% (higher), or 39.35% (additional rate) — with no NICs on dividends.

Liability — the often-overlooked factor

As a sole trader, your personal assets (home, savings) are at risk if the business cannot pay its debts. As a limited company director, your liability is generally capped at your share capital — unless you have personally guaranteed debts or acted improperly. For businesses with meaningful contracts, suppliers, or employees, this protection matters.

Admin burden

• Sole trader: Register for Self Assessment, keep bookkeeping records, file one annual return. Relatively light-touch.
• Limited company: File annual statutory accounts at Companies House, submit a Corporation Tax return (CT600) to HMRC, file a Confirmation Statement, and run a payroll if you pay yourself a salary. More compliance, but manageable with a good accountant.

IR35 note for contractors

If you work through a personal service company and your engagement is caught by the IR35 off-payroll working rules, the tax advantage of a limited company is significantly eroded. You will effectively pay income tax and NICs as if employed, removing most of the dividend benefit. Specialist advice before setting up is essential.

When does incorporation make sense?

• Profits consistently above £30,000–£35,000 per year
• You want to retain profits in the company and reinvest rather than draw everything out
• You want limited liability protection
• You are dealing with larger clients who prefer a Ltd entity
• You are planning to grow, take on staff, or seek investment

At Gerify, we model both scenarios for every client before making a recommendation. The right answer costs you nothing to find out — book a free discovery call.

What is Making Tax Digital?

Making Tax Digital (MTD) is HMRC's programme to replace paper-based and manual tax record-keeping with digital systems. The aim is to reduce errors, make tax liabilities visible in closer to real time, and — eventually — move away from the annual Self Assessment cycle towards quarterly digital reporting.

MTD for VAT — already mandatory

MTD for VAT has applied to all VAT-registered businesses since April 2022. If you are VAT-registered, you must already be keeping digital records and submitting VAT returns through MTD-compatible software. Acceptable software includes Xero, QuickBooks, Sage, and FreeAgent, among others.

MTD for Income Tax Self Assessment (MTD for ITSA)

This is the next phase, and it affects sole traders and landlords. Under MTD for ITSA, affected taxpayers will need to submit quarterly digital updates to HMRC throughout the year, plus a final year-end declaration — replacing the current annual Self Assessment return. The rollout schedule is:

• April 2026: Sole traders and landlords with qualifying income above £50,000 must comply.
• April 2027: Extended to those with qualifying income above £30,000.
• Further expansion below £30,000 is planned but not yet confirmed.

What does quarterly reporting involve?

Every quarter, you will submit a digital update to HMRC showing income and expenses for that period. These are not full tax returns — they do not crystallise your tax liability. The final year-end declaration does that, taking into account allowances and adjustments. But it means your bookkeeping must be current throughout the year, not caught up in one rush in January.

What software is compatible?

HMRC maintains a list of approved MTD-compatible software. Xero, QuickBooks, Sage, and FreeAgent are all on the list. At Gerify, we support clients on all four platforms and can help you migrate to the right one for your business type and budget well ahead of the deadline.

What should you do now?

• Check whether your qualifying income is likely to exceed £50,000 by April 2026.
• If yes — or if you are close — start keeping digital records now to make the transition easier.
• Review which MTD-compatible software suits your workflows.
• Speak to your accountant about how quarterly submissions will affect your workflow.

Getting MTD-ready is not just about compliance — it is an opportunity to have better real-time visibility of your finances throughout the year.

Typical UK accountant costs by service

• Self Assessment tax return (sole trader): £150 – £500 per year
• Sole trader annual accounts + Self Assessment: £500 – £1,500 per year
• Limited company full-service package (accounts, CT600, Self Assessment, Companies House): £800 – £3,000+ per year
• Bookkeeping: £50 – £200 per month depending on transaction volume
• Payroll: £5 – £15 per employee per month
• VAT returns: £50 – £150 per quarter
• Company formation: £100 – £400 as a one-off

Hourly billing vs fixed fees

Many traditional practices still charge by the hour, which makes budgeting unpredictable. You may receive a bill weeks after work is done, for an amount you had no way of anticipating. Fixed-fee practices — like Gerify — quote the full cost upfront, so there are no surprises. This also changes the relationship: you are more likely to call your accountant with a question if you know it will not trigger an invoice.

What drives fees up?

• Complexity of your affairs — multiple income streams, overseas income, investment portfolios
• Poor bookkeeping quality — the accountant has to reconstruct your records
• Late or incomplete information — rushed work costs more
• Advisory involvement beyond basic compliance

Is it worth hiring a Chartered Accountant?

ICAEW Chartered Accountants (ACA) hold the highest professional qualification in UK accountancy. Membership requires a minimum of three years' supervised training, passing professional examinations, and ongoing continuing professional development. The practical difference: a Chartered Accountant is more likely to spot a tax relief you have missed, structure your affairs correctly from the outset, and give you advice that holds up under HMRC scrutiny.

The cost of fixing poor tax advice — or defending an HMRC enquiry — almost always dwarfs the cost of getting it right first time.

A note on free services

Some platforms offer "free" accounts preparation. These services typically rely on automation, provide limited advisory support, and may not be regulated. A regulated, qualified accountant is worth the investment.

Who needs to file a Self Assessment tax return?

• Sole traders and partners in business partnerships
• Company directors receiving income not taxed at source
• Landlords with rental income
• Individuals with income over £100,000
• Anyone with untaxed income from savings, investments, or overseas sources
• Those subject to the High Income Child Benefit Charge (if either partner earns over £60,000)

Key deadlines for 2025/26 returns

• 5 October 2026: Deadline to register for Self Assessment if you are new to it.
• 31 October 2026: Deadline for paper tax returns.
• 31 January 2027: Online return deadline, payment of any tax owed, and first payment on account for 2026/27.
• 31 July 2027: Second payment on account for 2026/27.

Common allowable expenses for sole traders

• Office costs — rent, broadband, stationery, software subscriptions
• Vehicle costs — either actual expenses or HMRC's mileage rate (45p/mile for the first 10,000 miles, 25p thereafter)
• Staff costs — wages, employer NICs, pension contributions
• Professional fees — accountancy, legal, insurance
• Marketing, advertising, and website costs
• Training directly related to your current trade

Payments on account — the shock bill

If your Self Assessment tax bill (net of tax deducted at source) exceeds £1,000, HMRC requires you to make two advance payments on account toward next year's liability. Each is 50% of the current year's bill. This means your first Self Assessment bill as a sole trader can be 150% of what you expected. A good accountant will flag this in advance and help you plan for the cash flow.

Reducing your tax bill legitimately

• Claim all allowable expenses, including home office costs if you work from home
• Make pension contributions before the year end — contributions reduce your taxable income
• Check you are using your personal allowance and any reliefs you are entitled to
• If married, consider whether income-splitting arrangements are appropriate
• Review the timing of large expenses if you are on the boundary of higher rate tax

What is IR35?

IR35 — formally the off-payroll working rules — is HMRC legislation designed to identify contractors who, despite working through their own personal service company (PSC), are effectively employees of the end client. If caught inside IR35, you must pay Income Tax and National Insurance Contributions as if you were an employee, significantly reducing take-home pay.

Who determines your IR35 status?

Since April 2021, the responsibility shifted. For medium and large private-sector companies (and all public-sector clients), the end client must assess and communicate your IR35 status via a Status Determination Statement (SDS). Only small private-sector clients (meeting two of: fewer than 50 employees, turnover under £10.2m, balance sheet under £5.1m) remain where you determine your own status.

Inside vs outside IR35 — the financial impact

Working outside IR35 and drawing an optimal salary/dividend mix, a contractor on £70,000 contract income might take home 75–80% of gross. Inside IR35, taxed as a deemed employee with employer NICs deducted from their rate, the same contractor might take home 55–62%. The difference is material.

The three key IR35 tests

• Substitution: Do you have a genuine right to send a qualified substitute? If yes, and the client would accept one, this points outside IR35.
• Control: Does the client dictate what you do, where, when, and how? High control points inside IR35.
• Mutuality of obligation: Is the client obliged to offer work and you obliged to accept it? If so, this points inside IR35.

Protecting your outside-IR35 status

• Ensure your contract accurately reflects the real working arrangement — clauses the client would not accept in practice are not worth the paper they are on.
• Operate genuinely independently — have your own equipment, business stationery, and professional liability insurance.
• Exercise the substitution right if possible, or ensure it is genuinely offered.
• Avoid office hours, company events, or management structures that make you look like an employee.

IR35 contract reviews

Before starting a new contract, it is worth having both the contract and working practices reviewed by a specialist. At Gerify, we support contractors with IR35 advice, limited company accounting, and ongoing tax planning tailored to the contracting market.

What is the VAT registration threshold?

For 2025/26, the compulsory VAT registration threshold is £90,000 in taxable turnover in any rolling 12-month period. This is the highest threshold in Europe. Once you exceed it, you must register within 30 days of realising you have passed the threshold (not the end of the month — the moment you know). HMRC can back-date the registration if you are late.

What happens if you register late?

HMRC will require you to account for VAT on taxable sales from the date you should have registered — even if you did not charge your customers VAT. This means you absorb the VAT from your own margin, which can be very expensive. Penalties for late registration can also apply on top.

Should you register voluntarily below the threshold?

Voluntary registration can make sense if your main customers are VAT-registered businesses (who can reclaim the VAT you charge), or if you have significant input VAT to reclaim on purchases. If you mainly sell to consumers, adding 20% to your prices may hurt competitiveness — model this carefully before deciding.

VAT schemes for small businesses

• Standard rate: Charge 20% VAT, reclaim input VAT on purchases, file quarterly returns. The default.
• Flat Rate Scheme (FRS): Pay a flat percentage of gross turnover to HMRC (the rate depends on your trade sector). Simpler admin but no separate input VAT reclaim. Good for service businesses with low costs.
• Cash Accounting Scheme: Account for VAT when you receive payment (not when you invoice). Helpful for businesses with slow-paying clients.
• Annual Accounting Scheme: File one annual return and make interim advance payments.

Making Tax Digital for VAT

All VAT-registered businesses must keep digital records and submit returns via MTD-compatible software. Paper returns are no longer accepted. If you are not already on a compatible platform, this should be addressed immediately.

What is Section 24 (the mortgage interest restriction)?

Prior to April 2017, individual landlords could deduct mortgage interest as a business expense, reducing their taxable rental profit. Section 24 phased this out completely. Since April 2020, individual landlords instead receive a basic rate tax credit (20%) on their finance costs — not a deduction against income. This means:

• Higher-rate taxpayers pay considerably more tax on the same rental income
• Some landlords are now paying tax on profits they have not actually made after financing costs
• Rental income can push landlords into higher tax bands, affecting other allowances

Allowable expenses landlords can still deduct

• Letting agent fees and management charges
• Maintenance and repairs (not capital improvements)
• Buildings and contents insurance
• Accountancy and legal fees directly related to the rental business
• Ground rent and service charges
• Utility bills where you pay them (not the tenant)
• Council Tax on void periods
• Travel to inspect or manage properties

Should you hold property in a limited company?

A limited company is not subject to Section 24 and can deduct mortgage interest in full. This makes incorporation attractive for portfolio landlords — particularly those building new portfolios from scratch. However, transferring existing properties into a company typically triggers Stamp Duty Land Tax and Capital Gains Tax on the market value at transfer date. Whether this makes financial sense requires careful modelling of the long-term tax saving against the upfront cost.

Capital Gains Tax on residential property

CGT on UK residential property must be reported to HMRC and any tax paid within 60 days of completion of the sale. The rates for 2025/26 are 18% (basic rate taxpayers) and 24% (higher/additional rate taxpayers) on residential property. Private Residence Relief exempts your main home but not investment properties.

Making Tax Digital for landlords

Landlords with gross rental income — combined with any self-employment income — exceeding £50,000 must comply with MTD for ITSA from April 2026. This means quarterly digital updates to HMRC, replacing the current annual Self Assessment return.

Current Corporation Tax rates (2025/26)

• Small profits rate: 19% — applies to companies with profits up to £50,000
• Main rate: 25% — applies to profits above £250,000
• Marginal relief — tapers the effective rate for profits between £50,000 and £250,000

When is Corporation Tax due?

For most small companies, the Corporation Tax payment is due 9 months and 1 day after the end of your accounting period. HMRC charges interest on late payments and automatic penalties for late returns starting at £100, rising to £1,000+ for extended delays.

Allowable deductions that reduce taxable profit

• Salaries, employer NICs, and pension contributions
• Director pension contributions (subject to annual allowance limits)
• Business travel and accommodation
• Equipment, software, and professional subscriptions
• Rent, rates, and utilities on business premises
• Marketing, advertising, and website costs
• Accountancy and legal fees

Annual Investment Allowance (AIA)

The AIA allows you to deduct the full cost of qualifying plant and machinery in the year of purchase, up to £1,000,000. This is a powerful relief for capital-intensive businesses — buying the right assets before your year end can significantly reduce your Corporation Tax liability for that period.

R&D Tax Credits

If your company undertakes qualifying research and development, you may be able to claim enhanced deductions or a cash credit. Since April 2024, the previous SME and RDEC schemes have been merged into a single regime. R&D relief is one of the most frequently unclaimed allowances — many businesses do not realise their activities qualify.

Extracting profit as a director-shareholder

The most tax-efficient approach for most director-shareholders is to take a salary up to the Secondary NIC threshold (£5,000 for 2025/26), with the remainder as dividends. Dividends are taxed at lower rates (8.75% basic rate, 33.75% higher rate, 39.35% additional rate) and are not subject to NICs. Your accountant should model the optimal extraction strategy for your personal circumstances each year — particularly as dividend allowances have been reduced in recent years.