A limited company is its own legal person, separate from you. That separation is what protects your assets and changes how you are taxed.
The single most important word in "limited company" is limited, and it does not refer to size. It describes how much you can lose. Set your business up as a limited company and, in law, it becomes a separate person: it signs its own contracts, owns its own assets, owes its own debts. If it fails, your personal exposure is generally capped at what you put in. That legal wall is the reason millions of UK businesses incorporate, and it changes how everything, including tax, works.
The defining feature of a limited company is that it is legally distinct from the people behind it. When you incorporate, the company becomes its own entity. It can hold a bank account, own property, employ staff and be sued, all in its own name rather than yours. You, as a shareholder, own the company; you are not the company.
This is the crucial contrast with being a sole trader, where you and the business are one and the same and your liability is unlimited. In a limited company, if the business collapses owing money, creditors normally cannot pursue your home or savings (barring fraud or personal guarantees). That protection is the headline benefit and the main reason higher-risk businesses incorporate.
A limited company does not pay Income Tax on its profits; it pays Corporation Tax. For the 2025/26 financial year the rates are tiered:
| Profit level | Corporation Tax treatment |
|---|---|
| Up to £50,000 | 19% (small profits rate) |
| £50,000 to £250,000 | 25% with marginal relief (effective rate tapers up) |
| Over £250,000 | 25% (main rate) |
Once the company has paid Corporation Tax, the after-tax profit belongs to the company, not directly to you. To get money out, directors typically take a modest salary (deductible for the company and within or near the Personal Allowance) plus dividends from post-tax profit. Estimate a company's bill with the Corporation Tax calculator.
Consider a one-person consultancy, run by Joanna, with £80,000 of profit before any director pay in 2025/26. Compare a simplified extraction approach.
| Step | Amount |
|---|---|
| Company profit before director salary | £80,000 |
| Director's salary (deductible) | £12,570 |
| Profit subject to Corporation Tax | £67,430 |
| Corporation Tax (19% on first £50k, 25% with marginal relief above) | approx. £14,250 |
| Post-tax profit available as dividends | approx. £53,180 |
Joanna then pays personal tax on her £12,570 salary (covered by the Personal Allowance, so nil Income Tax) and on the dividends she draws, after the £500 Dividend Allowance, at dividend rates of 8.75%, 33.75% or 39.35% depending on her band. The combined company-plus-personal tax is what you compare against a sole trader's Income Tax and National Insurance. The limited company vs sole trader calculator does this comparison properly for your figures.
Incorporation is not free of cost or effort. A limited company must register with Companies House, file annual accounts and an annual Confirmation Statement, maintain statutory registers, and submit a Company Tax Return (CT600) to HMRC alongside its accounts. Director and shareholder details are on the public register. Get the paperwork wrong or late and penalties follow.
For many businesses that administrative load is worth it for the liability protection and tax flexibility, especially as profits climb above the higher-rate threshold. For a low-profit, low-risk venture, the simpler sole trader route often wins. There is no universal answer; it is a calculation specific to your numbers and your appetite for admin and risk.
A limited company buys you a legal wall between your business and your personal assets; the price is more paperwork and public disclosure.
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