Switching from sole trader to limited company is one of the most common business structure changes in the UK. As your profits grow, the tax savings from incorporation become significant — but the process itself has tax traps that can wipe out a year’s worth of savings if you get it wrong.

This guide covers the practical steps of incorporating, the tax implications of transferring your business, and the decision of whether it’s worth it. For the broader comparison of sole trader vs limited company — including which gives more take-home pay at different profit levels — see our sole trader or limited company guide. This article focuses on the process of switching.

What Is Incorporation?

Incorporation is the process of switching from sole trader to a limited company: you form a new company with Companies House, transfer your business assets to it, close your sole trader registration, and start paying yourself via salary and dividends instead of drawings. You cannot convert a sole trader business into a company — you create a new legal entity and move the business into it. The main tax trap is the transfer itself: if your assets (especially goodwill) have increased in value, you may owe Capital Gains Tax unless you claim Incorporation Relief.

Should you switch? The quick decision test

Before getting into the process, check whether incorporation is worth it for you. The general rule for 2026/27:

  • Profit under £25,000: Stay sole trader. The admin cost of a limited company (£500-£1,500/year in accountant fees) exceeds the tax saving.
  • Profit £25,000-£40,000: Marginal. The tax saving starts to outweigh the admin cost, but it depends on your circumstances. Run the numbers.
  • Profit above £40,000: Usually worth incorporating. Corporation tax at 19% (on profits up to £50,000) plus dividend tax at 10.75%/35.75% beats the combined sole trader rate of 26% (20% income tax + 6% NI) on most profit levels.

The key factors:

  • Corporation tax is 19% on profits up to £50,000, rising to 25% on profits above £250,000 with marginal relief in between
  • Dividend tax in 2026/27 is 10.75% (basic rate), 35.75% (higher rate), 39.35% (additional rate), with a £500 annual allowance
  • You can take a salary up to the Personal Allowance (£12,570) tax-free, reducing corporation tax
  • Dividends are paid from post-tax profit — so the combined company + personal tax is roughly 19% + 10.75% = ~29.75% on basic-rate income, vs 26% as a sole trader. The saving comes from the salary portion and the lower NI (no Class 4 on dividends)

For worked examples at different profit levels, see our sole trader or limited company guide.

Step 1: Form the company

You can form a limited company online in 10-30 minutes. There are three routes, and the price difference is significant:

  1. Companies House directly — gov.uk/limited-company-formation/register-your-company. Costs £100 (digital) or £124 (paper), usually takes 24-48 hours. This is the official route — you deal directly with the registrar, no intermediary.
  2. Formation agent — Faster, costs £15-£100 depending on extras (registered office, document templates). Popular agents include 1st Formations, Rapid Formations, and others.
  3. Via a business account provider — Some providers bundle company formation into their account opening process for £14.99. They act as a formation agent, and your company is registered with Companies House exactly as if you’d done it directly.

The £14.99 formation route: how it works

The cheapest route is through a business account provider like Tide, which charges £14.99 to form your company as part of the account opening process. Tide is effectively acting as a formation agent — they handle the Companies House filing for you, and the £14.99 covers their fee (Tide absorbs the £100 Companies House fee as a customer acquisition cost). According to Companies House’s fee schedule, the standard digital incorporation fee has been £100 since 1 February 2026 — so the saving is £85.

The key point — and this surprises people — is that you’re not tied to the account you register with. The company is a separate legal entity registered with Companies House. Once it’s formed, you can close the Tide account and open a business account with Starling, Monzo, or any high-street bank. The company isn’t affected by which provider you used to form it. Multiple Reddit users in r/UKBusiness confirmed this works: register via Tide for £14.99, close the account, bank elsewhere.

Is this safe? Yes. Tide is FCA-authorised (firm reference 900843) — technically an e-money institution rather than a bank, with accounts powered by ClearBank. The formation is real: Companies House registers your company regardless of whether you used their website, a formation agent, or a provider’s bundled service. The £14.99 route is simply Tide acting as a formation agent and absorbing the cost to acquire you as a customer. If your account application is rejected but the company is formed successfully, you still have your company — you just need a different business account.

The downside: You’ll need to open a second business account anyway if you don’t want to stay with Tide (see Step 2), so you’re doing two applications instead of one. And some users report Tide’s customer support is slow if anything goes wrong with the account opening. If you value simplicity over saving £85, register directly with Companies House.

The general rule: Choose your business account for its banking features, not for the formation discount. The £85 saving is a one-off — the account you use for years matters far more. But if you don’t mind closing the Tide account after formation, the £14.99 route is the cheapest way to incorporate.

You’ll need:

  • Company name — check it’s available on the Companies House register
  • Registered office address — must be in the UK; can be your home or your accountant’s office
  • Director details — your name, address, date of birth, nationality
  • Shareholder details — who owns the shares (often just you)
  • Share structure — how many shares, at what value (common: 1 share at £1, or 100 shares at £1)
  • SIC code — your business activity classification
  • People with Significant Control (PSC) — usually you, as the sole director/shareholder

Once formed, you’ll receive a Certificate of Incorporation with your company number. The company is now a separate legal entity.

Step 2: Open a business bank account

Limited companies must have a separate business bank account — unlike sole traders, you can’t use a personal account. The company is a separate legal entity, so the account must be in the company’s name.

Most sole trader accounts also offer limited company accounts. See our best business bank accounts guide for options — Starling, Monzo, Tide, Mettle and the high-street banks all accept limited companies.

You’ll need your Certificate of Incorporation and company details to open the account.

Step 3: Register the company for taxes

Corporation Tax

You must register your new company for Corporation Tax within 3 months of starting to trade. You’ll get a Corporation Tax UTR number (separate from your personal UTR). Register at gov.uk/register-for-corporation-tax or through your accounting software.

PAYE (if you’ll pay yourself a salary)

If you plan to take a salary (recommended — up to £12,570 is tax-free and reduces corporation tax), you must register as an employer for PAYE. Register at gov.uk/register-employer before your first pay run.

VAT

If your turnover is above the VAT threshold (£90,000 in 2026/27), you must register for VAT. If you were VAT-registered as a sole trader, you can transfer the registration to the company or cancel and re-register. See our VAT registration guide for the threshold rules.

Making Tax Digital

Limited companies are not affected by MTD for Income Tax — that applies to sole traders and landlords only. However, if the company is VAT-registered, it must file VAT returns under MTD for VAT rules. If you (as a director) have personal self-employed or rental income above the MTD thresholds, you’ll still need to file under MTD for Income Tax personally. See our MTD for limited companies guide for how the regimes interact.

Step 4: Transfer the business to the company

This is the step with the most tax risk. When you transfer your sole trader business to a limited company, you’re treated as selling the business assets to the company at market value. This can trigger Capital Gains Tax.

What gets transferred?

  • Goodwill — the value of your customer base, reputation, and brand. If your business has been trading for years and has established customers, goodwill has a real market value. This is often the biggest taxable gain on incorporation.
  • Equipment and machinery — transferred at market value. If these have depreciated, there may be no gain. If they’ve appreciated (rare), there’s a gain.
  • Stock and inventory — transferred at cost (or market value if lower).
  • Property — if you own business premises personally, transferring them to the company is a disposal for both CGT and Stamp Duty Land Tax purposes. This is complex — get professional advice.
  • Cash — you can keep the cash from your sole trader business personally (it’s yours) or lend it to the company. It’s not part of the business transfer for tax purposes.

The tax trap: Capital Gains Tax on transfer

When you transfer assets at market value, any gain (market value minus your original cost) is potentially subject to Capital Gains Tax. In 2026/27, CGT rates are 18% (within the basic rate band) and 24% (above it), with an annual exempt amount of £3,000.

For most sole traders, the biggest potential gain is on goodwill. If you started the business from scratch, your cost is £0 — so the entire market value of the goodwill is a gain.

Incorporation Relief: deferring the gain

Incorporation Relief (section 162 TCGA 1992) lets you defer the CGT on the transfer by reducing the base cost of your company shares by the amount of the gain. No tax is due now — instead, the gain is effectively taxed when you eventually sell the shares.

Important change from 6 April 2026: Incorporation Relief is no longer automatic. Previously, if you transferred your business (and all its assets) to a company in exchange for shares, the relief was given automatically. From 6 April 2026, you must actively claim the relief on your Self Assessment return for the tax year of the transfer. The claim must include:

  • A description of the business transferred
  • The type of person transferring (individual, partnership, etc.)
  • The chargeable assets and their values at transfer
  • The cost of the new shares received
  • The amount of relief being claimed

If you don’t claim, the gain is taxed in the year of transfer at the normal CGT rates (18% or 24%).

The old formal election to disapply Incorporation Relief (section 162A) was repealed from 6 April 2026. If you’d rather pay the CGT now (e.g., to use Business Asset Disposal Relief), you simply don’t claim Incorporation Relief.

Business Asset Disposal Relief: paying 18% now instead of deferring

If you’d rather pay the CGT on incorporation now at a lower rate, Business Asset Disposal Relief (BADR) reduces the CGT rate to 18% on qualifying gains, up to a £1 million lifetime limit.

To qualify:

  • You must have owned the business for at least 2 years before the transfer
  • The disposal must be of the whole (or part of) the business — not just individual assets
  • You must claim BADR on your Self Assessment return by the first anniversary of the 31 January following the tax year of disposal

For a sole trader incorporating in 2026/27, the choice is:

  • Claim Incorporation Relief: defer the gain into your share base cost. No tax now, but the gain is taxed at dividend/CGT rates when you eventually sell the shares.
  • Don’t claim, claim BADR instead: pay 18% on the gain now (up to £1m lifetime limit). The shares take the full market value as their base cost, so no deferred gain to tax later.

Which is better depends on:

  • The size of the gain (if it’s under £1m and you haven’t used your BADR lifetime limit, BADR at 18% is attractive)
  • Whether you expect to sell the company soon (if so, paying 18% now and having a higher share base cost may be better)
  • Your expected tax rate when you sell the shares (if you’ll be a higher-rate taxpayer, deferring could mean 24% later vs 18% now)

Get professional advice if your business has significant goodwill or assets. The wrong choice can cost tens of thousands of pounds.

Step 5: Close the sole trader registration

Once the company is trading and the business has been transferred, you need to close your sole trader registration:

  1. Tell HMRC on your Self Assessment return — in the self-employment pages, enter the cessation date (the date you stopped trading as a sole trader). This triggers a final sole trader return covering the period from your normal year-end to the cessation date.
  2. Send a letter to HMRC (optional but recommended) — confirming you’ve ceased self-employment. Include your name, UTR, National Insurance number, and the date you stopped.
  3. Keep filing Self Assessment if you have other income to declare — dividends from the new company, rental income, other self-employed income, or if your total income is above £100,000.
  4. Deregister from VAT (if you were VAT-registered as a sole trader and didn’t transfer the registration to the company) — use form VAT7.

Your personal UTR number remains yours — it doesn’t disappear when you close the sole trader business. You’ll still need it for filing Self Assessment returns covering your dividend income and any other personal income.

The final sole trader tax return

Your final sole trader return covers the period from your last year-end to the cessation date. For example, if your year-end was 5 April and you incorporated on 30 June 2026, your final return covers 6 April 2026 to 30 June 2026. This is a short-period return.

You’ll also need to account for any payments on account you’ve made — these may be adjusted or refunded depending on your final profit figure.

Step 6: Start paying yourself through the company

Once the company is trading, you pay yourself differently:

  1. Salary through PAYE — set up payroll, pay yourself up to the Personal Allowance (£12,570/year in 2026/27). This is tax-free for you (within your Personal Allowance) and reduces the company’s corporation tax bill. The company must operate PAYE and file RTI returns.
  2. Dividends — take additional money as dividends from post-tax profit. Dividends are paid from the company’s after-tax profit, so the company pays corporation tax (19% up to £50,000 profit) first, then you pay dividend tax (10.75% basic rate, 35.75% higher rate, 39.35% additional rate) on what you take, minus the £500 annual dividend allowance.
  3. Director’s loan — if you need money before the company has profits, you can lend yourself money from the company (up to £10,000 interest-free without a benefit in kind charge). This is recorded in the director’s loan account and repaid from future dividends or salary.

For how this compares to taking drawings as a sole trader, see our how to pay yourself as a sole trader guide.

Common traps to avoid

1. Transferring assets without considering CGT

The biggest mistake. If your business has goodwill, brand value, or appreciated assets, transferring them to the company triggers a CGT charge unless you claim Incorporation Relief. Always calculate the potential gain before incorporating.

2. Not claiming Incorporation Relief from April 2026

From 6 April 2026, Incorporation Relief is not automatic. If you transfer your business and don’t claim the relief on your Self Assessment return, you’ll be taxed on the gain at 18% or 24% — even if you intended to defer it. Make sure your accountant or tax software flags the claim.

3. Mixing personal and company funds

Limited companies are separate legal entities. Paying for personal expenses from the company account creates a director’s loan, which must be repaid within 9 months after the company year-end or trigger a section 455 tax charge (33.75% of the loan). This is a common error for new directors used to sole trader flexibility.

4. Not registering for PAYE before the first pay run

If you’re paying yourself a salary, you must register for PAYE before the first payment. Late registration can trigger penalties. Register at least 2 weeks before your first pay run.

5. Forgetting the final sole trader return

You still need to file a Self Assessment return for the period you traded as a sole trader in that tax year, even after incorporating. Missing this triggers late filing penalties.

6. Not timing the incorporation with your year-end

The cleanest transition is to incorporate on the day after your sole trader year-end. This means your final sole trader return covers a full 12-month period, and the company starts cleanly from day one of the new period. Incorporating mid-year creates a short-period return and overlapping accounting periods.

Do you need an accountant?

For the incorporation itself, you can do it without an accountant — forming the company and registering for taxes is straightforward. But for the tax planning around the transfer (Incorporation Relief vs BADR, goodwill valuation, salary/dividend optimisation), professional advice is strongly recommended if:

  • Your business has goodwill or significant assets
  • Your annual profit is above £50,000
  • You own business property personally
  • You have existing partners or employees

A one-off consultation with an accountant (£200-£500) can save you thousands in tax. For ongoing accounting, expect to pay £500-£1,500/year for a small limited company — see our should I hire an accountant guide.

The bottom line

Incorporating can save significant tax once your profits exceed £30,000-£40,000, but the process has real tax traps. The three things to get right:

  1. Time the incorporation with your sole trader year-end for clean accounting
  2. Decide on Incorporation Relief vs BADR before you transfer — and if you want to defer, remember to actively claim Incorporation Relief from April 2026 (it’s no longer automatic)
  3. Set up PAYE and payroll before your first pay run, and start paying yourself via salary and dividends instead of drawings

For whether the switch is worth it at your profit level, see our sole trader or limited company guide. For how drawings work before you switch, see our how to pay yourself as a sole trader guide.

For the full comparison of self-employed business structures — sole trader, limited company, umbrella, and CIS — see our self-employed business structure hub.

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