Last updated: October 2026

When you go freelance, one of your first decisions is how to set yourself up. Most independent professionals in the UK choose between three routes: working as a sole trader, setting up a limited company, or working through an umbrella company. 

Each route affects how much tax you pay, how much admin you take on, and how you are seen by clients. The rules have changed a lot in the last few years, so even if you set up a while ago, it is a good time to check your structure still suits you. 

This guide sets out how each route works, the main pros and cons, and what has changed for 2026/27. It is general information, not tax advice, so speak to a qualified accountant before you decide. 

What's changed recently 

Key changes at a glance (newest first) 

• April 2026: Dividend tax rose. Dividends are now taxed at 10.75% (basic rate) and 35.75% (higher rate), up from 8.75% and 33.75%. 

• April 2026: Making Tax Digital began. Sole traders with income over £50,000 must now send quarterly updates to HMRC. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028. 

• April 2026: Tighter rules for umbrella companies. Agencies and clients can now be held liable if an umbrella fails to pay the tax it owes. 

• November 2025: Companies House identity checks began. All company directors must verify their identity. Existing directors have until November 2026. 

• April 2025: Employer National Insurance rose. Companies now pay 15% on salaries above £5,000 a year, up from 13.8% above £9,100. 

• April 2024: Sole trader National Insurance fell. Class 2 contributions are no longer compulsory, and the main Class 4 rate was cut to 6%. This narrows the tax gap between sole traders and limited companies. 

• April 2024: VAT threshold raised to £90,000, up from £85,000. 

• April 2024: Dividend allowance cut to £500, down from £1,000 (and £2,000 before April 2023). 

The three routes at a glance 

Sole trader 

• Best for: starting out, lower earnings, simplicity 

• Set up: register with HMRC online, free 

• Tax: income tax and National Insurance on your profits 

• Admin: Self Assessment, plus quarterly updates under Making Tax Digital if over the threshold 

• Liability: you are personally liable for business debts 

• Costs: often low; many manage without an accountant 

Limited company 

• Best for: higher earnings, outside IR35 work, building a business 

• Set up: register with Companies House, small fee 

• Tax: corporation tax on profits; you take a salary and dividends 

• Admin: annual accounts, company tax return, confirmation statement, payroll and Self Assessment 

• Liability: limited, although banks often ask for personal guarantees 

• Costs: accountant fees are usual 

Umbrella company 

• Best for: inside IR35 roles, short contracts, trying freelancing out 

• Set up: sign up with the umbrella, usually within a day 

• Tax: PAYE through payroll, like an employee 

• Admin: very little; the umbrella handles it 

• Liability: none for business debts 

• Costs: a weekly or monthly fee, plus employer costs taken from your pay 

Working as a sole trader 

As a sole trader, you work in your own name and are the sole owner of your business. It is the simplest structure: there are no shares or directors, and you can register with HMRC online in a few minutes, free of charge. 

You pay income tax and National Insurance on your profits through Self Assessment. Sole trader National Insurance has become cheaper in recent years, so the tax gap between sole traders and limited companies is narrower than it used to be, especially at lower earnings. 

Making Tax Digital: the big change for sole traders 

Sole traders can no longer assume they only have one annual tax return to worry about. Under Making Tax Digital for Income Tax, sole traders must keep digital records, use compatible software and send quarterly updates to HMRC once their income passes a threshold: 

• From April 2026: income over £50,000 

• From April 2027: income over £30,000 

• From April 2028: income over £20,000 

The threshold is based on your total income from self employment and property, before expenses. If you are close to it, now is a good time to choose software and get your records in order. 

Advantages 

• Simple to set up and run. Registration is free, and the admin is lighter than running a company. 

• Lower costs. Many sole traders manage their own tax returns, although Making Tax Digital makes software, and often an accountant, more worthwhile. 

• More privacy. Your accounts are not published anywhere. 

• Flexible. You can move to a limited company later if your income grows. 

Disadvantages 

• Personal liability. There is no legal separation between you and your business. If the business runs into debt, your personal assets could be at risk. 

• Can be less tax efficient at higher earnings. As your profits rise into the higher rate band, a limited company may save you tax. 

• Perception. Some larger clients prefer, or require, contractors to work through a limited company. 

• No employer pension contributions. You can still pay into a personal pension and get tax relief, but you cannot make company contributions. 

Working through a limited company 

A limited company is a separate legal entity with its own name and shares. You register it with Companies House and usually become its director and shareholder. Clients pay the company, and you pay yourself from the company's profits. 

How the tax works 

Most freelance directors take a mix of a small salary and dividends: 

• Corporation tax is paid by the company on its profits: 19% on profits up to £50,000, rising gradually to 25% on profits above £250,000. 

• Salary is paid through payroll. The company pays employer National Insurance at 15% on salary above £5,000 a year. Companies where the director is the only employee cannot claim the Employment Allowance, which would otherwise offset this cost. 

• Dividends are paid from profits after corporation tax. From April 2026, dividends are taxed at 10.75% in the basic rate band and 35.75% in the higher rate band, after a £500 tax free allowance. 

The right salary and dividend mix depends on your circumstances, and an accountant can work this out for you. A limited company is still usually more tax efficient once profits are well into the higher rate band, but the saving is smaller than it was a few years ago. 

Advantages 

• Can be more tax efficient at higher earnings, and you have more control over when you take income. 

• Limited liability. The company is responsible for its own debts, so your personal assets are generally protected. Be aware that banks and landlords often ask directors for personal guarantees, which removes this protection for those debts. 

• Pension contributions. The company can pay into your pension directly, which can be very tax efficient. 

• Credibility. Some clients prefer working with limited companies, and it can make it easier to raise finance or grow a team. 

Disadvantages 

• More admin. Each year you file accounts with Companies House, a company tax return with HMRC, a confirmation statement and your own Self Assessment. You also run payroll. If you register for VAT (required once turnover passes £90,000), there are quarterly VAT returns too. Most directors use an accountant. 

• Identity checks. All directors must now verify their identity with Companies House. Existing directors have until the end of the transition period in November 2026, and you cannot file until this is done. 

• Less privacy. Your company details and accounts are on the public register. Small companies can currently file limited accounts, but more information is likely to become public in future as Companies House reforms take effect. 

• Directors' duties. As a director you have legal responsibilities, including acting in the company's best interests and keeping proper records. 

• IR35. If your work for a client looks like employment, you may be taxed like an employee anyway. See the next section. 

IR35: what it means if you choose a limited company 

IR35, also called the off payroll working rules, decides whether someone working through their own company should be taxed like an employee. If a contract is "inside IR35", you pay broadly the same tax and National Insurance as an employee, and most of the tax benefit of a limited company disappears for that work. 

Who decides? 

• Medium and large clients decide your status and must give you a status determination statement explaining their decision. You can challenge it. 

• Small clients leave the decision to you. A client counts as small if it meets two of these three: turnover up to £15 million, balance sheet up to £7.5 million, and up to 50 employees. These thresholds were raised from April 2025, although the change takes time to apply because it is based on previous years' accounts. 

What is looked at? The main tests are whether you can send a substitute, how much control the client has over how, when and where you work, and whether there is an ongoing obligation to offer and accept work. How you actually work matters as much as what your contract says. 

IR35 is assessed contract by contract, so you can be outside IR35 with one client and inside with another. Inside IR35 work is usually paid through an umbrella company or agency payroll. 

The Employment Rights Act 2025 does not change IR35, and it does not give employment rights to freelancers working genuinely outside IR35. It does make clients more careful about how they engage people, so clear contracts and genuine independence matter more than ever. 

For more detail, read our IR35 guide and our Employment Rights Act 2025 guide.

Working through an umbrella company 

An umbrella company employs you and handles the paperwork for your contracts. Your client or agency pays the umbrella, which takes off its fee, employer costs, tax and National Insurance, and pays you through payroll like any other employee. 

Umbrella companies are a popular choice for inside IR35 contracts, for short assignments between permanent roles, or if you want to try freelancing before committing to setting up your own business. 

Advantages 

• Very little admin. No accounts, company returns or payroll to run. 

• Quick to start. You can usually be set up within a day. 

• Employment rights. As an employee of the umbrella, you are entitled to things like statutory sick pay, holiday pay and workplace pension contributions. 

Disadvantages 

• No tax advantages. You pay tax like an employee, and the employer costs are usually taken from the rate your client pays, so your take home pay can be noticeably lower than the headline rate suggests. 

• Fees. Umbrellas charge a weekly or monthly fee. 

• Not all umbrellas are equal. Some have historically failed to pay the tax they deducted, or used schemes that left workers with unexpected tax bills. 

The April 2026 rules 

Since April 2026, if an umbrella company fails to pay the PAYE tax it owes, HMRC can recover it from the agency or client further up the chain. A licensing regime for umbrellas is also expected in 2027. 

For freelancers, this is good news: agencies and clients have a strong reason to use only reputable umbrellas. Still, check before you sign up: 

• Ask the agency which umbrellas it recommends 

• Look for accreditation from a recognised industry body 

• Check your payslips each time, and make sure the deductions add up 

• Be wary of any umbrella promising take home pay that looks too good to be true 

Which route is right for you? 

There is no single right answer. It depends on what you earn, the kind of work you take on, and how much admin you are happy to handle. 

• Just starting out, or earning at lower levels? A sole trader set up is simple, cheap and easy to change later. 

• Earning well into the higher rate band, with mostly outside IR35 work? A limited company is likely to save you tax and gives you more flexibility, including pension contributions. 

• Taking on inside IR35 roles, short contracts, or testing the water? An umbrella company takes the admin away. 

Many freelancers use more than one route over their career, or even at the same time, for example a limited company for outside IR35 work and an umbrella for an inside IR35 contract. 

Whichever way you are leaning, a qualified accountant can look at your figures and tell you what makes sense for you. It is worth reviewing your set up each year, as tax rules change with each Budget. 

How The Work Crowd can help 

The Work Crowd connects experienced freelance, fractional and interim professionals in communications, marketing, public affairs, sustainability and commercial leadership with organisations that need them. Whether you work as a sole trader, through your own company or via an umbrella, we can help you find your next role. 

Join The Work Crowd community or get in touch to talk to our team. 

Madeleine Weightman is Co-Founder and COO at The Work Crowd, working with businesses to find flexible solutions and helping consultants build rewarding portfolio careers.