Sole trader or limited company for freelancing?

Sole trader is simpler and cheaper to start (just register with HMRC) and is the right choice for low-revenue or hobby-adjacent freelance work. Limited company offers better tax efficiency above roughly £30,000-£40,000 of profit, plus liability separation and credibility for B2B work. Most established freelancers run limited companies; most starting freelancers begin as sole traders.

When should I register as self-employed?

HMRC requires registration by 5 October of the tax year following your first self-employed income. So if you start freelancing in May, you have until the next October to register. In practice, register as soon as you start invoicing; it makes everything cleaner.

Can I set up freelance work during my notice period?

You can do all the admin (form a company, register with HMRC, open a business bank account, set up an accountant, build a website). You can't take on paid client work that conflicts with your current employer's contract, and you can't compete with them. Set up the structure during notice; start trading after employment ends.

How much will I earn freelancing compared to employed?

Typical UK professional freelance day rates are £200-£700, translating to £40,000-£140,000 annualised at 200 billable days. The reality is more variable: gaps between projects, no paid leave, no employer pension contributions, time spent on admin and marketing. After all that, most freelancers earn roughly 1.2-1.5x their employed equivalent salary if business is steady.

Going Freelance After Employment (UK 2026)

Decision 1: sole trader or limited company

Sole trader is the simpler structure. You register with HMRC as self-employed, you file an annual self-assessment, and any profit is taxed at your normal income tax rates plus Class 2/4 National Insurance. There’s no separation between you and the business; you’re personally liable for business debts.

Limited company is a separate legal entity. You incorporate at Companies House (24 hours, around £50-£100 with a formation service), file annual accounts and corporation tax returns, take pay through a small salary plus dividends, and the company is liable for its own debts. The tax efficiency gets better as profits rise; above roughly £30,000-£40,000 of annual profit, a limited company usually wins.

For most professional freelancers (consultants, designers, developers, copywriters, contractors) the limited company is the right structure from the start, particularly if clients are themselves limited companies who prefer to deal with another business entity. If you can use a formation service like Your Company Formations to handle the Companies House paperwork in one day, the admin barrier disappears.

Decision 2: when to register

HMRC’s formal deadline is 5 October of the tax year after you start trading. So if you start freelancing in May 2026, you have until October 2027 to register. In practice, register as soon as the company is formed and you’re ready to invoice; the deadline is the latest possible date, not the right date.

For a sole trader, registration is a quick HMRC form and a Self Assessment Unique Taxpayer Reference. For a limited company, register the company at Companies House first; HMRC then automatically opens a corporation tax record once they’re notified. You also separately register for VAT if your taxable turnover crosses the £90,000 threshold (or choose to register voluntarily below that).

Decision 3: setup during the notice period

Your notice period is administratively the best time to set up the new business, but legally a careful one. You’re still employed; your existing contract applies; the implied and explicit duties of loyalty are still in force. So the rule is: handle structural admin (incorporation, banking, accountant, basic website) during notice; don’t take paid work, don’t contact your employer’s clients, and don’t compete.

What you can do safely during a notice period or garden leave: form a limited company, register with HMRC, open a business bank account, set up an accountant, build a website that isn’t live yet, create email and social profiles, draft your first contract template, talk to ex-colleagues at other companies (not currently your employer’s clients) about potential work after your employment ends. See garden leave explained for the detail.

Decision 4: the first invoice

The first invoice marks the actual start of self-employed income. Realistic timing for most freelancers: business formed and ready by the time employment ends, first client conversation in the first 1-2 weeks of being free, first contract signed in weeks 3-6, first invoice raised in weeks 4-8, first payment received in weeks 6-12.

That gap between leaving employment and first paid invoice is the most important number to plan for financially. Use PILON, redundancy money, or savings to bridge it. Most freelancers underestimate this gap and find themselves panicking 4 weeks in. Plan for 3 months of zero freelance income from the start, even if reality turns out kinder.

Tax basics for the first year

Sole trader: Self Assessment is due by 31 January for the tax year ending the previous April. Your first tax bill covers everything you’ve earned in that tax year, plus a payment on account for the following year (50% of the year’s bill). So if your first year nets £30,000 of profit, your January self-assessment bill will be roughly £6,500-£8,000 plus another £3,000-£4,000 payment on account. Set this money aside as you earn.

Limited company: Corporation tax (currently 19-25% depending on profit level) is due 9 months and 1 day after the company’s year-end. Annual accounts are filed at Companies House. You take income through a small salary (£12,570 to use the personal allowance) plus dividends, with dividend tax payable through your Self Assessment. Specialist accountants handle this routinely.

Pension, insurance, and the safety net

Freelance work removes employer pension contributions, paid sick leave, and life insurance benefits you may have had as an employee. The new equivalents are: a SIPP (self-invested personal pension) or stakeholder pension you contribute to yourself; income protection insurance to cover serious illness; life insurance if you have dependents.

None of these are urgent in week 1, but all of them should be in place by month 3-6. Budget roughly 5-10% of revenue for these as a running cost; the equivalent value of employer-paid versions of the same things was probably larger.

Frequently asked questions

Sole trader or limited company for freelancing?: Sole trader is simpler and cheaper to start (just register with HMRC) and is the right choice for low-revenue or hobby-adjacent freelance work. Limited company offers better tax efficiency above roughly £30,000-£40,000 of profit, plus liability separation and credibility for B2B work. Most established freelancers run limited companies; most starting freelancers begin as sole traders.
When should I register as self-employed?: HMRC requires registration by 5 October of the tax year following your first self-employed income. So if you start freelancing in May, you have until the next October to register. In practice, register as soon as you start invoicing; it makes everything cleaner.
Can I set up freelance work during my notice period?: You can do all the admin (form a company, register with HMRC, open a business bank account, set up an accountant, build a website). You can't take on paid client work that conflicts with your current employer's contract, and you can't compete with them. Set up the structure during notice; start trading after employment ends.
How much will I earn freelancing compared to employed?: Typical UK professional freelance day rates are £200-£700, translating to £40,000-£140,000 annualised at 200 billable days. The reality is more variable: gaps between projects, no paid leave, no employer pension contributions, time spent on admin and marketing. After all that, most freelancers earn roughly 1.2-1.5x their employed equivalent salary if business is steady.

General information about going freelance. For tax and legal questions specific to your circumstances, contact an accountant or solicitor.

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Going freelance after employment