For years the standard advice was simple: once your shop makes decent money, form a limited company and pay less tax. That advice is now out of date. The dividend tax rises that landed in April 2026 took most of the pure-tax case for incorporating off the table — which means the decision is back to being about what it should have been about all along: liability, admin and how you want to run things.
Here's the current picture, checked against gov.uk in June 2026. As ever: not tax advice, and an hour with an accountant before you decide is money well spent.
Sole trader: the default for a reason
You can start selling today. No registration, no fees — if your gross trading income stays at £1,000 or less in a tax year, you don't even need to tell HMRC. Past £1,000, you register for Self Assessment, and the deadline matters: 5 October after the end of the tax year you started in. Miss it and penalties can follow.
The running costs are light. You pay income tax on profits (20% in the basic band, 40% above £50,270 — thresholds now frozen until 2031, so inflation drags you toward them) plus Class 4 National Insurance at 6%. Records are straightforward, an accountant for a sole trader return typically costs a few hundred pounds, and nothing about your business appears on any public register.
The catch is in the name: you are the business. If the business owes money or gets sued — and a shop selling physical products carries real product-liability exposure — there's no legal wall between the business's problems and your house.
Limited company: what you're actually signing up for
A company is a separate legal person. That's the headline benefit — debts and claims generally stop at the company — and the price is administration, more of it than it used to be:
Incorporation now costs £100 (doubled in February 2026). The annual confirmation statement is £50. Since November 2025, directors must verify their identity with Companies House — new directors at incorporation, existing ones at their next confirmation statement. You file accounts every year on a fixed clock, corporation tax is due nine months and a day after year end, and your name and a service address sit on a public register. Accountancy realistically runs £600–£1,000+ a year more than a sole trader pays.
And the discipline that catches most people out: the company's money is not your money. You take it out as salary, dividends or a documented loan — nothing else. Dividends can only be paid from actual profits; paying them when there are none is unlawful, not just untidy.
The tax maths, honestly (2026/27)
Run the numbers on £60,000 of profit, all taken out to live on. As a sole trader you'd pay roughly £13,900 in tax and NI. Through a company — minimal salary, the rest as dividends — you'd pay roughly… £13,900. The two structures are now within about £20 of each other at that level, before the company's extra accountancy bill. At £40,000 profit, the company comes out around £1,200 worse. The April 2026 dividend rises (basic rate now 10.75%, higher 35.75%) did exactly what they look like they did.
Where a company still genuinely wins on tax: when you don't need all the money. Profits left in the company are taxed at 19% (up to £50,000) and nothing more until you take them out — useful if you're reinvesting in stock, saving toward something, or smoothing income across years. Employer pension contributions and sharing ownership with a spouse can also tip the sums. If you're drawing every pound to pay the mortgage, they won't.
The reasons that actually decide it
Liability. Selling candles is not selling skincare is not selling electrical goods. The more your products could plausibly hurt someone or something, the stronger the case for a company (and for product liability insurance either way).
Wholesale and B2B credibility. Some suppliers and trade platforms simply prefer dealing with a registered company. If wholesale is your route, this can settle the question on its own.
Privacy, in reverse. Sole traders appear on no register. Company directors are public — name, service address, month and year of birth. Use a registered-office service rather than your home address, and note you can now apply to suppress your home address from old filings.
Paperwork tolerance. Be honest about whether you'll keep up with filings. Late accounts and unverified directors carry real penalties, and "my accountant didn't do it" is not a defence — the law holds the director responsible.
Making Tax Digital is here either way
Since April 2026, sole traders with over £50,000 of gross self-employment income keep digital records and send HMRC quarterly updates through software. The threshold falls to £30,000 in April 2027 and £20,000 in 2028 — so a healthy shop gets pulled in quickly. Factor the software and habit in from the start and it's a non-event; discover it in year three and it's a scramble.
Start simple, switch when it's earned
The good news: this isn't a one-way door, and switching is routine. Most shops should start as sole traders — prove the idea, learn your numbers, keep the admin light. Incorporate when something concrete demands it: profits you're retaining rather than spending, a wholesale door that needs a company number, product risk that needs a wall around it. The move itself is mechanical — incorporate, close off your self-employment with HMRC, transfer the assets, new bank account — and your shop carries on as if nothing happened.
Whichever you choose, the store itself doesn't care. You can launch on Orbit as a sole trader this afternoon and become a limited company next year without rebuilding anything — update your business details and policies, and keep selling.