How to Change from Sole Trader to Limited Company

Learn how to switch from sole trader to limited company in the UK, including registration steps, tax rules and business changes

Switching from sole trader to limited company is a big step in your business journey. It can bring tax benefits, limited liability and a more professional image, but it also comes with new responsibilities and extra paperwork. If you have been running your business as a sole trader and are now ready to incorporate, this guide walks you through every step of the process.

Why switch from sole trader to limited company?

There are several reasons why sole traders decide to form a limited company:

  • Tax efficiency: Limited companies pay corporation tax on profits, which is often lower than personal income tax rates for higher earners.

  • Limited liability: Your personal assets are protected if the company runs into debt.

  • Professional credibility: A limited company structure can boost trust with clients, suppliers and lenders.

  • Growth potential: It is easier to take on investors, partners or staff as a limited company.

While there are benefits, the move also involves more admin, stricter record keeping and additional filing requirements.

Step-by-step guide to switching

  1. Choose your company name and register your company
    Visit GOV.UK and register your limited company through Companies House. The cost is £50 as of 2025. You will need a unique name, a UK registered office address, and at least one director and shareholder.

  2. Set up a business bank account
    Your new company must have its own bank account. You cannot use your personal account. Choose a bank and provide your certificate of incorporation and company number during the application.

  3. Tell HMRC you are stopping as a sole trader
    Once your limited company starts trading, you must inform HMRC that you are no longer self-employed. You can do this by completing the ‘stop being self-employed’ form online. You must still file a final Self Assessment tax return for the period up to your end date.

  4. Register your company for Corporation Tax
    After your company is formed, register it with HMRC for Corporation Tax within three months of starting to trade. HMRC will send you a letter with your company’s Unique Taxpayer Reference (UTR) shortly after incorporation.

  5. Register for PAYE if you are paying a salary
    If you want to pay yourself through the company, you will need to register as an employer with HMRC and run payroll. Most directors take a small salary and top up their income with dividends for tax efficiency.

  6. Transfer your business assets to the company
    If you own assets such as equipment, stock, or a website, you will need to transfer them from yourself to the company. You can either sell them to the company or gift them. Keep written records of any transfers and valuations.

  7. Notify clients, suppliers and update your details
    Let your clients and suppliers know about the change. You may need to issue a new contract in the company’s name and update your invoices, website and marketing materials with the company details.

  8. Consider VAT registration
    If your turnover is above £90,000, VAT registration is compulsory. Even if you are below the threshold, voluntary registration might still benefit your business, especially if you sell to VAT-registered clients.

What happens to your UTR and Self Assessment?

You will keep the same personal UTR for Self Assessment, but your new limited company will receive its own Corporation Tax UTR. Even after becoming a director, you may still need to complete a Self Assessment tax return for dividends, salary or other income.

What about your existing business name?

If you used a trading name as a sole trader, you may be able to register a similar name for your limited company, as long as it is not already taken. Check name availability on the Companies House website before you start.

What are the tax implications of switching?

  • Your limited company will pay corporation tax on profits

  • You can take money out of the company as salary and dividends

  • Dividends are taxed separately, and there is no National Insurance on them

  • You can no longer deduct personal expenses from your tax bill in the same way

  • Transferring assets could trigger capital gains tax in rare cases, though this is unlikely for small businesses

Speak to an accountant before switching, especially if you have valuable assets, long-term contracts or are partway through a tax year.

Real-world example

Tom runs a web design business as a sole trader and earns around £60,000 a year. As his income grows, he decides to set up a limited company. He registers online through Companies House, informs HMRC he is no longer self-employed and starts invoicing through his new company. He transfers his website and laptop to the company and opens a business bank account. He now pays himself a small salary through PAYE and takes the rest of his income as dividends, reducing his tax bill.

Final thoughts

Moving from sole trader to limited company can offer financial and legal benefits, especially as your business grows. But it also brings added complexity and new rules to follow. By planning ahead and following the correct steps, you can make the transition smooth and professional.

Before making the switch, it is worth speaking to an accountant to ensure your new structure is right for your goals and that you avoid any tax traps along the way.