When should I move from limited company to sole trader: A practical guide for UK business owners

The decision to change your business structure from limited company to sole trader isn’t one that most business owners take lightly. Yet every year, thousands of UK entrepreneurs discover that their business has evolved beyond what their current structure serves best – or perhaps their priorities have shifted towards simplicity over complexity.

Maybe you’re spending more time on company administration than actual business activities. Perhaps the accountancy fees are eating into profits that could be better used elsewhere. Or you might simply be questioning whether all the regulatory requirements and compliance obligations are worth it for your particular situation. These are all valid reasons to explore whether you should close your limited company and become a sole trader for the 2025/26 tax year.

Key considerations when switching business structures:

• Annual profits under £50,000 may favour sole trader status
• Simplified tax obligations and reduced admin burden
• Loss of limited liability protection
• Different tax rates and National Insurance implications
• Impact on business credibility and future growth plans

Understanding the financial implications of business structure change

When sole trader status might be more tax-efficient

For many small business owners, particularly those with profits under £50,000, sole trader status can offer genuine advantages. Self-employed individuals pay Income Tax and Class 2 and Class 4 National Insurance, which can work out cheaper than the combination of corporation tax, dividend tax, and the administrative costs of running a limited company.

Consider a graphic designer in Dartford earning £35,000 annually. As a limited company director taking optimal salary/dividend combinations, they might save a few hundred pounds in tax, but lose thousands in additional accountancy fees, Companies House filings, and administrative time. For this level of income, sole trader status often provides better overall value when considering dissolving limited company tax implications.

The calculation becomes more complex as profits increase, but there’s often a sweet spot where sole trader status remains advantageous even for higher earners, particularly when you factor in the simplified administration and reduced professional fees. Many business owners find a limited company vs sole trader tax calculator helpful for comparing their specific circumstances.

Circumstances that favour moving to sole trader status

Simplified business operations

If your business has evolved into essentially personal services without employees, complex transactions, or significant assets, the protection and structure of a limited company may be unnecessary overhead.

Reduced administrative burden

Sole traders have simpler tax obligations –Self Assessment returns instead of corporation tax returns, confirmation statements, and dividend paperwork. For busy business owners in Kent who want to focus on their work rather than administration, this simplification can be transformative.

Lower professional fees

Most accountants charge significantly less for sole trader services compared to limited company compliance. Over time, these savings can be substantial, particularly for smaller businesses.

Personal service businesses

Consultants, freelancers, and personal service providers often find that clients are comfortable working with sole traders, and the limited liability protection offers less practical benefit than for businesses with higher risk profiles.

Key disadvantages to consider carefully

Loss of limited liability protection

This is the most significant consideration. As a sole trader, you’re personally liable for all business debts and legal issues. While professional indemnity insurance can provide some protection, it’s not equivalent to corporate limited liability.

Potential tax disadvantages at higher profit levels

For businesses with profits significantly above £50,000, the combination of corporation tax rates and dividend taxation often becomes more favourable than sole trader Income Tax and National Insurance rates.

Reduced business credibility

Some larger clients prefer working with limited companies, viewing them as more established and professional. This perception can affect your ability to win certain contracts or work with particular sectors.

Future growth limitations

If you plan to employ staff, raise investment, or sell the business, limited company status provides more flexibility and options.

The practical process of changing business structure

Step 1: Financial analysis

Calculate your total costs under both structures, including tax, National Insurance, professional fees, and administrative time. Don’t just look at headline tax rates – consider the complete picture.

Step 2: Timing considerations

The end of your company’s financial year is often the cleanest time to make this change, though it’s possible at any point with proper planning.

Step 3: Formal closure process

Closing a limited company involves settling all debts, distributing assets, and following Companies House dissolution procedures. This isn’t something to rush or handle without professional guidance.

Step 4: Transition planning

Consider how you’ll handle existing contracts, client relationships, and business continuity during the transition period.

Tax implications of the transition

Extracting company assets and cash

Any remaining assets or cash in the company need to be distributed, which may trigger tax liabilities. Sometimes this distribution is treated as capital gains rather than dividend income, which can be tax advantageous. In certain circumstances, Business Asset Disposal Relief may apply to qualifying business disposals, potentially reducing the capital gains tax rate to 14% on gains up to the lifetime limit of £1 million (correct as at July 2025). However, the rules are complex and professional advice is essential to determine eligibility.

Dealing with company debts and creditors

All company obligations must be settled before dissolution. This includes outstanding tax liabilities, supplier payments, and any loans or credit agreements.

Ongoing obligations

Even after deciding to close, the company remains liable for all obligations until formal dissolution is complete. This process typically takes several months.

Quick comparison: Limited company vs Sole trader

Aspect	Limited Company	Sole Trader
Taxes	Corporation tax + dividend tax	Income tax + National Insurance
Administration	Complex compliance, filing requirements	Simple Self-Assessment
Personal liability	Limited liability protection	Unlimited personal liability
Professional costs	Higher accountancy fees	Lower professional fees
Business credibility	Often preferred by larger clients	Suitable for personal services
Future flexibility	Better for growth and investment	Simpler for lifestyle businesses

Consider a web developer in Canterbury who built a successful limited company over five years. As his children grew older, he wanted to scale back to part-time work, focusing on a smaller client base. The administrative overhead of maintaining a limited company for reduced profits no longer made sense, so transitioning to sole trader status allowed him to simplify his business while maintaining profitability.

Conversely, many business owners considering this change discover that optimising their limited company structure – perhaps through better dividend planning or expense management – provides better outcomes than when to change business structure entirely. End of tax year planning for April 2025 changes can significantly impact this decision.

Professional guidance for business structure decisions

Changing from limited company to sole trader involves complex considerations around tax, legal liability, business relationships, and future plans. The financial calculations alone require careful analysis of multiple scenarios and tax implications.

At Adams Accountancy, we regularly help Kent business owners evaluate whether their current business structure still serves their needs. Our approach involves comprehensive financial modelling and practical advice about the real-world implications of structure changes.

Understanding professional accounting services for business growth includes knowing when your current structure might be holding you back rather than helping you forward.

Frequently asked questions about changing business structure

1. How much does it cost to close a limited company?

The basic Companies House strike-off fee is £10, but professional fees for ensuring proper closure typically range from £500-£1,500 depending on complexity. This is usually much less than continuing to run an unsuitable company structure.

2. Do I need an accountant to become sole trader?

While not legally required, professional advice is highly recommended for the transition process and ongoing tax obligations. Many sole traders find accountancy support invaluable for maximising allowable expenses and ensuring compliance.

3. What are the disadvantages of being sole trader?

The main disadvantages include unlimited personal liability, potentially higher tax rates at higher profit levels, reduced business credibility with some clients, and less flexibility for future growth or investment.

4. Can I use the same business name as a sole trader?

You can trade under your company name as a sole trader, but you’ll need to check trademark issues and inform clients about the structure change. The company name becomes available for others to use once dissolved.

5. What happens to my business bank account?

Company bank accounts must be closed as part of the dissolution process. You’ll need to open a new business account as a sole trader, though some banks can help transition existing relationships.

6. How long does the closure process take?

From decision to final dissolution typically takes 3-6 months, depending on the complexity of winding up affairs and Companies House processing times.

7. Will my clients need to sign new contracts?

Yes, existing contracts are with the limited company, so new agreements will be needed with you as a sole trader. This provides an opportunity to review terms and ensure continuity.

8. Can I change back to a limited company later?

Absolutely. Many business owners move between structures as their circumstances change. There’s no restriction on forming a new company later if your situation evolves.

9. When is the best time to make this change for 2025/26 tax planning?

The end of your company’s financial year is often optimal, though changes can be made at any time. Consider changes to tax rates and allowances when timing your decision.

Getting the right advice for your situation

The decision to move from limited company to sole trader depends on your specific circumstances, profit levels, risk tolerance, and future plans. What works for one business owner may be completely wrong for another, even in similar situations.

We help business owners across Kent make informed decisions about business structure through comprehensive analysis and clear, practical advice. Our business advisory services include structure optimisation and transition planning.

Ready to evaluate your business structure?

If you’d like to discuss whether your current business structure still makes sense for your circumstances, get in touch for a free chat. We’ll analyse your specific situation and provide clear recommendations about the best path forward.

Sometimes the answer isn’t changing structure but optimising how you use your current setup. Either way, you’ll have the information needed to make the right decision for your business and personal situation.