Your business structure is the single biggest tax decision you’ll make as a self-employed person. It determines how you’re taxed, how you pay yourself, what liability you carry, and how much admin you do. Get it right and you keep more of what you earn. Get it wrong and you’ll overpay tax, or face a costly restructuring later.
This hub compares the four main options — sole trader, limited company, umbrella company, and CIS — shows the tax efficiency at different income levels, explains when IR35 affects the choice, and links to the detailed guide for each.
1. The Four Structures at a Glance
| Structure | Tax efficiency | Admin burden | Liability protection | Best for |
|---|---|---|---|---|
| Sole trader | Lower at low profits | Low | None | Profits under £30-40k, simple businesses |
| Limited company | Higher at higher profits | Medium-high | Yes | Profits over £30-40k, growing businesses |
| Umbrella company | Same as PAYE | Low | Yes | Inside-IR35 contractors |
| CIS (subcontractor) | Same as sole trader/Ltd | Low | Depends on underlying structure | Construction subcontractors |
CIS isn’t a separate structure — it’s a deduction scheme that applies to sole traders or limited companies working in construction. The umbrella company isn’t your business — you’re an employee of the umbrella. The real choice is between sole trader and limited company, with umbrella and CIS as modifiers.
2. Sole Trader: The Simplest Option
A sole trader is the default — you are the business. You’re taxed on your profit (income minus expenses) through Self Assessment, regardless of how much you withdraw. There’s no separate legal entity, so you have unlimited personal liability for business debts.
Tax: Income tax (20%, 40%, or 45%) plus Class 2 NIC (£3.80/week) and Class 4 NIC (9% on profits £12,570-£50,270, 2% above). No corporation tax.
Pros: Simple to set up (just register for Self Assessment), minimal admin, full control, no filing fees.
Cons: Higher tax at higher profits, no liability protection, harder to sell or transfer, personal assets at risk.
For the full guide on what sole trader status means for your tax, see our self-employed tax UK guide. For how to pay yourself, see our how to pay yourself as a sole trader guide.
3. Limited Company: More Tax-Efficient at Higher Profits
A limited company is a separate legal entity. You own shares in it, and it pays corporation tax on its profits. You pay yourself through a combination of salary (low, to use your personal allowance) and dividends (which have lower tax rates than income tax up to the higher-rate threshold).
Tax: Corporation tax (19% on profits up to £50,000, marginal relief up to £250,000, 25% above). Personal tax on salary and dividends: dividends up to £500 are tax-free, then 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).
Pros: Lower overall tax above ~£30-40k profit, liability protection, easier to sell or transfer, pension contributions are more tax-efficient, perceived professionalism.
Cons: More admin (annual return, accounts, Corporation Tax return), Companies House filing fees, salary/dividend optimisation needed, can’t withdraw money freely.
For the full comparison — including worked examples at different income levels — see our sole trader or limited company guide. For the step-by-step process of switching, including the CGT and Incorporation Relief traps, see our sole trader to limited company guide.
4. Umbrella Company: For Inside-IR35 Contractors
An umbrella company employs you under PAYE. They invoice the client or agency, handle tax and NI deductions, and pay you a net salary. You have no admin, but you pay full PAYE tax plus the umbrella’s margin (typically £15-30/week).
When to use an umbrella: When your contract is inside IR35 and you don’t want the admin of running your own limited company. The umbrella handles everything, but you lose the tax efficiency of dividends.
When NOT to use an umbrella: When your contract is outside IR35 — a limited company is more tax-efficient. Or when you’re genuinely self-employed with multiple clients — a sole trader or limited company is better.
For the full guide on how umbrella companies work, what deductions appear on your payslip, and when to choose one, see our umbrella company payslip deductions guide.
5. CIS: The Construction Deduction Scheme
CIS (Construction Industry Scheme) is not a business structure — it’s a tax deduction scheme that applies to subcontractors in the construction industry, regardless of whether they’re sole traders or limited companies. The contractor deducts 20% (or 30% if unregistered) from your pay and sends it to HMRC as an advance payment toward your tax.
For sole traders under CIS: You reclaim overpaid deductions through your Self Assessment return. Most subcontractors get a refund because the 20% is deducted before expenses and the personal allowance.
For limited companies under CIS: CIS deductions are set off against your PAYE and NI liabilities. Excess deductions can be refunded at year-end.
Gross payment status: If your turnover is over £30,000 and you have a clean compliance record, you can apply for gross payment status (0% deduction) — the contractor pays you the full amount and you handle your own tax.
For the full CIS framework, see our CIS for subcontractors guide. For the refund process specifically, see our CIS tax refund guide.
6. How IR35 Affects Your Structure Choice
IR35 (off-payroll working rules) determines whether a contractor is treated as employed or self-employed for tax purposes. If your contract is inside IR35, you’re treated as an employee for tax — you pay full PAYE and NI, and a limited company offers no tax advantage. If your contract is outside IR35, you’re genuinely self-employed and a limited company is more tax-efficient.
The structure implications:
- Inside IR35: Umbrella company (simplest) or limited company (you pay yourself as salary, no dividend benefit)
- Outside IR35: Limited company (most tax-efficient) or sole trader (simpler but higher tax at higher profits)
For the full IR35 rules, how to determine your status, and what it means for your structure, see our IR35 for sole traders guide.
7. The Tax Efficiency Comparison at Different Income Levels
The right structure depends on your profit. Here’s the rough crossover:
| Annual profit | Best structure | Why |
|---|---|---|
| Under £12,570 | Sole trader | Within personal allowance — no income tax either way |
| £12,570-£30,000 | Sole trader | Tax difference is small; sole trader is simpler |
| £30,000-£50,000 | Limited company | Corporation tax at 19% beats income tax + NI at 26%+ |
| £50,000-£100,000 | Limited company | Significant tax saving, especially with dividend optimisation |
| Above £100,000 | Limited company | Maximum tax saving, but get professional advice |
These are rough guides — your actual position depends on pension contributions, other income, whether you need to withdraw all profits, and your personal circumstances. For the full comparison with worked examples, see our sole trader or limited company guide.
8. How to Transition Between Structures
If you’re switching from sole trader to limited company, the main tax trap is Capital Gains Tax on goodwill and appreciated assets. When you transfer assets to the company, you’re treated as disposing of them at market value. If goodwill has built up (and it has, if you’ve been trading for years), the gain can be significant.
Two options:
- Incorporation Relief: Defer the CGT by reducing the base cost of your company shares. No tax now, but the gain is taxed when you sell the shares. From 6 April 2026, you must actively claim this — it’s no longer automatic.
- Business Asset Disposal Relief: Pay the CGT now at 18% (up to a £1m lifetime limit) instead of deferring. The shares take the full market value as their base cost.
For the full transition process — including Companies House formation, CGT planning, and the salary/dividend setup — see our sole trader to limited company guide. For the CGT rules when selling a business outright (not incorporating), see our Capital Gains Tax on selling a business guide.
9. Gig Economy and Platform Workers: Which Structure?
If you work through platforms like Uber, Deliveroo, Just Eat, or Airbnb, your structure choice depends on your status:
- Genuine self-employment (multiple platforms, own equipment, set your own hours): Sole trader or limited company. You’re responsible for your own tax.
- Platform-employed (PAYE through the platform): The platform handles your tax. No structure choice needed.
- Short-term letting (Airbnb): Sole trader is simplest for most hosts. Limited company may be worth it for high-value portfolios.
For the full guide on how gig economy income is taxed and which structure fits, see our gig economy tax UK guide.
The Bottom Line
- The real choice is sole trader vs limited company. Umbrella and CIS are modifiers, not separate structures.
- Sole trader is simpler and cheaper to run. Best below ~£30-40k profit.
- Limited company is more tax-efficient at higher profits. Best above ~£30-40k, with the gap widening as profits grow.
- Umbrella company is for inside-IR35 contractors who want PAYE simplicity.
- CIS is a deduction scheme for construction — not a structure. You can be a sole trader or limited company under CIS.
- IR35 determines whether a limited company is worth it. Inside IR35 = umbrella; outside IR35 = limited company.
- Transitioning from sole trader to limited company has CGT traps. Plan for Incorporation Relief or BADR before you transfer.
- Get professional advice if your profit is above £50,000 or your situation is complex. The cost of advice is typically a fraction of the tax it saves.
For the full tax calculation showing how much you’d pay under each structure, see our how to work out self-employed tax guide. For the broader context of what self-employment means for your tax, see our self-employed tax UK guide. If you’re just starting out, see our starting out as self-employed guide.