Self-Employed or Limited Company: Making the Right Decision Before You Incorporate
Many self-employed individuals reach a point where they start asking the same question:
“Should I open a limited company?”
It’s often seen as a natural progression, a sign that the business is growing. In practice, however, incorporation is not automatically the most tax-efficient or sensible choice. In many cases, remaining self-employed is simpler, cheaper and more appropriate – even with the introduction of Making Tax Digital (MTD).
The right decision depends on your personal finances, profit levels and long-term plans, not just your turnover.
Start with your personal expenses
Before considering incorporation, the first and most important step is to calculate your personal living expenses.
Ask yourself:
- How much do I need to withdraw from the business each year to live comfortably?
- What level of income do I actually rely on personally?
When doing this calculation, exclude any investments. If you plan to invest (for example, into property, shares or long-term growth strategies), these are often more efficiently handled through a limited company, but only after incorporation, not as part of the decision to incorporate.
When incorporation is usually not beneficial
If you intend to withdraw all or nearly all of your profits each year, setting up a limited company is generally not advisable.
- Higher Costs and Complexity
- Limited companies come with:
- Statutory accounts
- Corporation tax returns
- Payroll and dividend processing
- Confirmation statements
- More detailed bookkeeping and compliance
The cost of maintaining a company is significantly higher than running a self-employment, even when accounting for MTD requirements.
Double taxation
Company profits are taxed first within the company and then taxed again when withdrawn personally. If all profits are taken out, the potential tax advantages of incorporation are often lost.
Example – £80,000 profit
If a self-employed individual earns £80,000, the total income tax and National Insurance payable would be £22,288.60.
If the same £80,000 is earned through a limited company and fully withdrawn, the total tax paid (corporation tax and dividend tax) would be £28,115.15.
In this scenario, incorporation results in approximately £5,826.55 more tax being paid, in addition to higher compliance costs, making self-employment the more efficient option when all profits are withdrawn.
MTD is still cheaper
Under Making Tax Digital, accounting work and fees for self-employed individuals are expected to increase to around £1,500 per year, as accounting software will need to be set up and five submissions per year will be required instead of the current single annual submission.
Even with this increase, self-employment remains more efficient and cost-effective than running a limited company purely for the sake of it.
When incorporation can make sense
Incorporation may be beneficial if one or more of the following apply:
- Profits Exceed Personal Needs
If your profits are significantly higher than your personal expenses, a limited company allows you to:
- Retain profits within the business
- Control when income is taxed
- Plan investments more efficiently
This is one of the strongest financial reasons to incorporate.
- Shared Ownership or Control
If you:
- Plan to bring in a partner
- Need clear ownership percentages
- Require structured control and profit distribution
- A limited company provides legal clarity and flexibility
- Strategic or Commercial Reasons
- Incorporation may also be appropriate if:
- Larger clients require you to operate through a company
- You want limited liability protection
- You’re planning long-term growth or eventual exit
Similar obligations
Many self-employed individuals are unaware that once their income reaches a certain level, their obligations already resemble those of a limited company.
For example:
- Turnover above £90,000 requires VAT registration
- Employing staff means running PAYE
- Subcontracting in construction triggers CIS obligations
At this stage, compliance responsibilities are already substantial, although the cost and tax treatment of a limited company can still differ significantly.
Making Tax Digital: We’re here to support you
If you remain self-employed and are required to comply with Making Tax Digital, we will support you every step of the way.
To help you transition smoothly, we offer:
- MTD-Compliant Accounting Software – from £10 per month
HMRC-approved, easy-to-use software that allows you to keep digital records and meet MTD submission requirements without unnecessary complexity.
- Quarterly Filing Service – £200+VAT per quarter
We can prepare and submit your quarterly MTD updates on your behalf, ensuring accuracy, compliance, and peace of mind.
- Annual Self-Assessment – No change to your current fee for existing clients
Your year-end Self-Assessment return will continue to be prepared at the same cost as this year, despite the additional MTD requirements.
Incorporation is not a default upgrade and is not suitable for everyone: if you withdraw all profits, remaining self-employed is usually more efficient, while a limited company may be beneficial where profits exceed personal needs or where structure, control, or investment planning is required. Basing the decision on real numbers rather than assumptions, and taking advice early, can save significant time, cost and stress later on.
Please contact our team on 0208 249 6007 if you have any questions or would like our assistance in making the right decision.