Staying a Sole Trader Isn't Falling Behind. It's a Financial Decision, and Right Now It's Usually the Correct One
If you’ve been a sole trader for several years and haven’t incorporated, you’ve probably felt it. The LinkedIn post from a peer announcing their new company. The accountant meeting that ends with “it’s worth considering.” The quiet sense that everyone else has made a decision you’re still sitting on.
None of that is evidence. It’s noise. And under 2025/26 rates, the evidence points the other way: for most freelancers earning £40,000 to £80,000, staying a sole trader is not the cautious option. It’s the financially correct one.
Four conditions that tip the decision against incorporating
The case for staying put is strongest when one or more of the following applies. You don’t need all four. In many situations, one is enough.
The net saving is too small to be material. At £40,000 and £50,000 of profit, the limited company structure costs approximately £1,100 more in tax than the sole trader position before you’ve paid a single accountancy fee. Add a realistic midpoint fee premium of £1,500 a year and the net position is approximately minus £2,600. That isn’t a marginal case. It’s a clear no.
Your main client is medium or large, and the contract is plausibly inside IR35. If a medium or large client determines your contract is inside IR35, the income is taxed at employment rates before it reaches your company, and the dividend strategy that justifies incorporation is unavailable for that income. What remains is the accountancy bill: a net cost of roughly £1,500 to £2,500 a year, at every band from £40,000 to £80,000.
There is no tipping point ahead of you within this range. Under 2025/26 rates, the net saving after accountancy costs is negative at every band between £40,000 and £80,000. Even at £60,000, the only band with a positive gross saving, the £500 advantage disappears under a £1,500 fee premium. Incorporating now in anticipation of a saving that depends on a rate environment that doesn’t yet exist is not a financially grounded decision. Wait, then run the numbers at your actual income under the rates actually in force.
Your admin time has a price. Running a limited company takes roughly 15 to 25 hours a year even with an accountant: payroll submissions, bookkeeping reconciliation, board minutes for every dividend, year-end queries. If ten of those hours would otherwise be billed at £50, that’s £500. At £75, it’s £750. That number belongs in the calculation alongside the fees, not in a vague mental category called “hassle”.
The advice gap has a commercial shape
Your accountant charges perhaps £200 to £500 a year for sole trader self-assessment and £1,200 to £3,000 for a limited company service. The revenue gap between those two recommendations runs from £700 to £2,500 per client, per year, in one direction.
That’s not an accusation of bad faith. Most accountants believe the general case for incorporation they were trained on. But the general case was built before the dividend allowance fell from £2,000 to £500, before the 2021 IR35 off-payroll extension, and before the April 2025 employer NI changes put £615 of employer NI on the standard director salary. Some freelancers who incorporated on the strength of that older arithmetic are now paying more in accountancy fees than they save in tax. The move that looked decisive on LinkedIn doesn’t always look decisive in the year-end accounts.
Doesn’t Making Tax Digital change this?
Partly, and it’s worth being precise about how much. From April 2026, sole traders with gross income above £50,000 must keep digital records and file four quarterly updates plus a year-end declaration: five interactions with HMRC a year instead of one, with software at £15 to £30 a month. Limited companies are exempt from MTD for Income Tax and carry on filing one annual Corporation Tax return.
So the simplicity argument for staying put narrows. It does not close. At £60,000, the net position after accountancy costs is approximately minus £1,000 a year; adding roughly £250 of MTD software takes it to about minus £1,250. The admin gap shrinks, and the financial conclusion doesn’t move. And if you’re earning below £50,000, MTD isn’t a factor in your immediate decision at all. The threshold falls to £30,000 in April 2027 and £20,000 in April 2028, so watch it, but don’t let a future filing obligation push you into a structure the numbers don’t support today.
A decision, not a default
Staying a sole trader, when the calculation says stay, is not the absence of a decision. It is the decision. It will hold up under scrutiny in a way that a move made on social pressure never can.
It’s also not permanent. Revisit it when your income grows and the rate environment changes materially, both together, not just one. Revisit it if your client mix shifts away from medium and large clients and your IR35 exposure falls. Until one of those triggers fires, you haven’t fallen behind anyone. You’ve run the numbers, and the numbers said no. That is the strongest position a freelancer can be in.
The complete calculation behind this post, at five income bands with IR35, Making Tax Digital, and the full admin picture included, is in my book “Your Number: The UK Freelancer’s Exact Guide to Knowing When Going Limited Actually Pays Off”, available at www.amazon.com. It’s the book that tells you plainly when the answer is no.
About the author: Kate Perrin is an ACA-qualified chartered accountant who spent four years in practice in Bristol before more than a decade as a sole trader, advising creative and independent businesses on their numbers. She nearly incorporated at £65,000 of profit, ran the full calculation, and stayed put.