Sole trader or limited company: what it actually changes for a builder

Somebody on site tells you that you are mad not to be limited. Your mate's accountant says wait until you are turning over six figures. Neither of them is looking at your numbers, and both of them are usually arguing about tax when the things that actually change for a builder are liability, who can hold the contract, and how the 20% the main contractor takes off your labour finds its way back to you.

This page is the construction version of that decision. Every rate below is the 2026-27 rate, every fee is the Companies House fee in force since 1 February 2026, and every figure names the statute, the regulation or the HMRC guidance it comes from.

What actually changes on the day you incorporate

Three things change, and only one of them is tax.

You stop being the business. A sole trader and their trade are the same legal person. The debts are yours, the contracts are yours, and a claim that runs past your public liability cover reaches your house. A company incorporated under the Companies Act 2006 is a separate legal person: it signs the contract, it holds the insurance policy, it owes the merchant, and your exposure is limited to what you put in as share capital, which for most builders is £1 or £100. That protection is real, and it has a doorway in it: a director who personally guarantees a merchant account, a finance agreement or a lease has signed the limit away for that debt. Directors' duties under sections 171 to 177 of the Companies Act 2006 are also personal, and trading on while insolvent is where the shield stops working.

Your money stops being your money. A sole trader draws cash out of the business account and that is the end of it. Company money belongs to the company. You get it out as salary through PAYE, as a dividend voted out of profit that has already borne Corporation Tax, or as repayment of money you lent in. Take it any other way and it is a director's loan, with a Corporation Tax charge of 35.75% under section 455 of the Corporation Tax Act 2010 if it is still outstanding nine months and a day after the year end. The rate is fixed by the date the loan was made, so 35.75% on anything lent on or after 6 April 2026 and 33.75% on a loan made between 6 April 2022 and 5 April 2026.

You become visible. Companies House publishes your directors, your people with significant control, your registered office and your accounts, and anybody can search them for nothing. For a subcontractor chasing work from main contractors that is often the point.

The bill for existing

Being a sole trader has no standing cost. Being a company has one, and it went up this year.

Add an accountant. A one-person sole trader's return is a few hundred pounds. Company accounts, a CT600, a confirmation statement and a payroll scheme are typically £1,000 to £2,000 a year for a small construction company. That standing cost is the first number to put against any tax saving, because it comes out whether you had a good year or a quiet one.

Where your CIS money comes back from, and when

This is the part a general business article has no reason to cover, and for a subcontractor it is usually the biggest practical difference of the lot.

Under section 61 of the Finance Act 2004 the contractor takes 20% of every payment other than the direct cost of materials, or 30% if you are not registered. On £120,000 of labour in a year that is £24,000 held by HMRC. Where the credit for it lands depends entirely on your structure.

A sole trader claims it on the Self Assessment return, in box 38 of the SA103S self-employment pages, set against the Income Tax and Class 4 National Insurance calculated on the same return. Anything over the liability is repaid.

A limited company cannot do that. HMRC's instruction on the point is blunt:

"If you pay CIS deductions, you must claim these back through your company's monthly payroll scheme. Do not try to claim back through your Corporation Tax return - you may get a penalty if you do."

What you must do as a CIS subcontractor, GOV.UK

The mechanism is the Employer Payment Summary. CIS340 paragraph 1.11 sets it out: the company reduces "the amount of PAYE, National Insurance contributions, Student Loan repayments and any CIS deductions that the company is due to pay by the amount of CIS deductions made from the company's own income", and where the deductions suffered exceed that bill, "the company should set-off the excess against future payments in the same tax year". Only after the final Full Payment Submission and EPS go in can the balance be refunded or set against Corporation Tax.

Read that against a one-person company. Your only employee is you, on a £12,570 salary. Your entire monthly PAYE bill is the employer National Insurance on that salary, about £95 a month. If £2,000 of CIS is coming off your invoices every month, the EPS absorbs £95 of it and carries £1,905 forward, and it does that twelve times. The route exists, but for a sole director with no payroll behind it the money still sits until after 5 April.

Which means the argument that incorporating frees up your CIS cash gets it backwards for most one-man outfits. It is a real advantage for a company with a few people on the books, or one that is itself a CIS contractor paying subbies, because those are the liabilities the deductions can eat every single month. The order the set-off runs in is fixed by regulation 56 of SI 2005/2045.

There is one failure mode worth knowing before you incorporate rather than after. HMRC's manual CISR77010 describes it exactly: a contractor who has been paying you for two years keeps paying under the old sole trader UTR after you go limited, and the deductions land on your personal CIS record while your company's payroll account claims deductions HMRC cannot see. Fixing it is a phone call and a wait. Preventing it is one email to every contractor on the day the company starts trading, carrying the new company UTR and the company registration number.

The full mechanics of both routes, including the CIS40 and CIS41 in-year repayment forms that release a sole trader's money before 31 January, are in getting your CIS deductions back.

The rates, side by side

Sole trader, on 2026-27 rates for England, Wales and Northern Ireland:

Class 2 National Insurance is treated as paid once profits reach the small profits threshold of £7,105, with no cash to find. Below that you can pay voluntarily at £3.65 a week to protect the state pension record.

Company profits:

Those two thresholds are divided by the number of associated companies you control, so a second company halves them. Marginal relief sits in Part 3A of the Corporation Tax Act 2010.

Then dividends, on top of Corporation Tax already paid:

The basic and higher dividend rates each went up by two percentage points on 6 April 2026. A "should I go limited" calculator written before that date is answering a different question from the one you are asking, and that two-point rise is the single biggest reason the arithmetic below lands where it does.

The arithmetic on £48,000 of profit

A plasterer clears £48,000 after materials, van, tools, insurance and phone. Same trade, same year, two structures.

As a sole trader:

Through a limited company, taking a £12,570 salary and the rest as dividends, which is the arrangement that leaves the most in your hand at this level:

The company is £1,372 worse off, before the £100 incorporation fee, the £50 confirmation statement and the extra thousand or so in accountancy. Call it two grand a year to be limited at £48,000 of profit.

Two things drive that. The dividend rate rise on 6 April 2026 is one. The other is the £1,135.50 of employer National Insurance, which a sole director's company cannot wipe out with the £10,500 Employment Allowance: the eligibility rules exclude a company where the director is the only employee liable for secondary Class 1 National Insurance. A single-van company pays that National Insurance in full.

So the honest answer for a one-person groundworker doing domestic extensions is that sole trader is very likely the right structure, and can stay the right structure for years. Nothing about being limited earns you the money back at that level.

The arithmetic when you leave money in the business

The picture changes when you stop drawing everything you earn. Same builder, better year, £120,000 of profit.

As a sole trader on £120,000 the bill is fixed by the profit, not by what you spent. The personal allowance tapers away by £1 for every £2 above £100,000, leaving £2,570 of it. Income Tax comes to £39,432 and Class 4 National Insurance to £3,656.60, so £43,088.60 goes to HMRC whether you took the money or left it in the account.

Through a company, drawing a £12,570 salary and dividends only up to the top of the basic rate band:

That £44,176.45 has already had Corporation Tax taken off it. It is working capital, and it is the reason contractors incorporate: it buys the mini digger, funds the materials on a job where the main contractor pays on 45 day terms, and covers the quiet January without you having borrowed anything.

It is a timing instrument rather than a discount. Draw that £44,176.45 out as dividends in a later higher rate year and it costs another £15,793 at 35.75%. Draw it in a lean year, or over several years inside the basic rate band, and it costs a good deal less. The sole trader had no such choice: the £43,088.60 was due on the profit, in that year, at that rate.

If you are anywhere near this level and weighing the decision, an hour with an accountant who actually does construction clients is the cheapest hour you will buy this year, because the answer turns on your drawings pattern rather than on your turnover.

What Companies House asks of a director since 18 November 2025

The Economic Crime and Corporate Transparency Act 2023 changed what it takes to be a director, and the change is recent enough that a lot of the incorporation advice in circulation still describes the old process.

Identity verification became a legal requirement on 18 November 2025. Every new director and every person with significant control must verify before the company can be incorporated. Two routes: GOV.UK One Login, which is free and can be done through the app, by answering security questions, or in person at a Post Office with photo identification; or an Authorised Corporate Service Provider such as an accountant or solicitor, who will charge for it. Verification produces a personal code you then give to Companies House.

If you already run a company, you are caught at your next confirmation statement, where the director's personal code has to be supplied. A director who has not verified cannot file the confirmation statement, cannot be appointed to anything new, and the company faces financial penalties and possible prosecution.

The rest of the standing obligations are ordinary once you know them. A confirmation statement is due at least once every 12 months, filed within 14 days of the end of the review period, with a fine of up to £5,000 and possible strike-off for not filing. Your registered office must be an address where post is delivered and acknowledged, and PO boxes have not been acceptable since 4 March 2024. You need a registered email address. You need a SIC code, and construction sits in Section F: 41202 for building domestic properties, 43210 electrical installation, 43220 plumbing and heating, 43310 plastering, 43320 joinery, 43910 roofing, 43999 for other specialised construction work. The step that is easiest to miss is registering the new company for Corporation Tax through the business tax account, which is a separate job from incorporating it.

How a main contractor reads the two

This is the part that decides the question for a lot of subbies, and it has nothing to do with tax.

A prequalification questionnaire from a main contractor, or a Common Assessment Standard assessment, generally asks for two or three years of accounts and runs a credit check. A limited company has filed accounts on a public register, so the assessor can pull them in thirty seconds and the credit agencies have something to score. A sole trader's Self Assessment return sits on no public register, so the usual substitute is a bank reference or a letter from your accountant. Neither is a rule about who can bid. It is a difference in how much friction there is between you and a yes.

Contract terms are the harder edge. Some main contractors' standard subcontract packages, and a fair number of framework agreements, are drafted for a corporate counterparty and their insurance requirements assume one. Where that is the case it tends to be stated in the tender documents, which is the cheapest way to find out whether it matters on the work you actually chase.

Insurance itself does not much care. Public liability, employers' liability and contractors' all risks are written for either structure, and the premium is driven by trade, turnover and claims history. What changes is who the policy names, and the answer has to match who signs the contract. A policy in your personal name behind a contract signed by your company is the gap that turns a claim into an argument.

Gross payment status reads a little differently across the two as well. The turnover test asks for £30,000 of net construction turnover for a sole trader, and for a company either £30,000 per director or £100,000 for the whole entity where five or fewer people control it. For a one-person company that is the same £30,000. For three directors it is £90,000 or the £100,000 whole-entity figure, whichever route you qualify under.

The £1,000 trading allowance and the 5 October deadline

If you are just starting and the answer might simply be "not yet", the trading allowance gives you £1,000 of gross trading income a year with no tax and no return. Take the third fence-panel job that pushes you past it and the obligation switches on. HMRC's wording in the tax-free allowances guidance is that "if your gross income for a tax year is more than £1,000, you must register for Self Assessment by 5 October in the following tax year".

Start trading in June 2026 and the tax year ends on 5 April 2027, so registration is due by 5 October 2027 and the first return by 31 January 2028. The Unique Taxpayer Reference arrives around fifteen days after you register, and you need it before a contractor can verify you for CIS, which is what stands between 20% and 30% coming off your labour. Registering early is worth doing for that reason alone.

If you are in Scotland

The company side of this decision is identical everywhere in the United Kingdom. Corporation Tax, National Insurance, CIS and Companies House are all reserved. Income Tax on a sole trader's profits is not.

A Scottish sole trader hits 42% at £43,663, roughly £6,600 earlier than the 40% band starts elsewhere in the UK, which pulls the balance of the decision towards incorporating at a lower level of profit than the same trade in Newcastle. Class 4 National Insurance is unchanged, because National Insurance is reserved.

The decision table

Going limited later, without losing anything on the way

Incorporating is not a form you file once. There is a construction-specific list attached to it.

Register the company as a CIS subcontractor in its own right. Subcontractor registration is once only for a given entity, but a limited company is a new entity, so the sole trader registration does not carry across, and neither does gross payment status. Gross status has to be applied for again and earned again against the business, turnover and compliance tests, and the compliance test has included VAT since 6 April 2024. If you hold gross status now, this is the fact worth planning around, because losing it for a few months puts 20% of your labour back into HMRC's hands. The tests and the application forms are in gross payment status.

Tell every contractor who pays you, in writing, the day the company starts invoicing: new company name, new UTR, company registration number, new bank details. This is the single step that prevents the CISR77010 problem.

If you also pay subcontractors, the company has to be registered as a contractor in its own right before it makes its first payment to a subcontractor, because the sole trader's contractor scheme does not carry across. Tell HMRC about the change of business structure as well; that notification has no fixed window, and the 90 day limit on GOV.UK applies only where a multiple contractor takes over another contractor's business.

Open the company bank account before you invoice through it, and stop putting company work through the personal one. The gross payment status business test asks for a bank account operated for the construction business, which makes it more than tidiness.

And keep the sole trader Self Assessment record open until the final return for the trading period is filed. The trade ceased, the person did not.

What it costs

There is no monthly subscription on AEC Stack. The platform fee is 2.5% of each invoice processed through the platform, collected on the payment due date, so it costs you nothing on the months you do not invoice and nothing on the work you take payment for elsewhere. Whichever structure you pick, the invoices carry the right CIS treatment for it, your deductions are totalled by contractor as they happen, and the year-end figure is already there when your return or your final EPS is due.

Run your own numbers before you decide anything: the CIS deduction calculator splits labour from materials and shows you what a year of deductions actually adds up to on your invoicing.

Pick the structure on your own drawings pattern rather than on somebody's turnover rule of thumb. Start with the numbers and see what a year of your invoicing looks like under each one.