Sole Trader or Limited Company? Setting Up Your Arbitrage Business in the UK

Both structures work for a UK contractor arbitrage business. Most operators start as a sole trader: free to set up, minimal admin, nothing to unwind if plans change. A limited company makes more sense once profits consistently clear £35,000-£50,000 a year, or when a specific contract demands it. Pick the right structure for now.

This post covers UK-specific rules. If you are outside the UK, your business structure, tax and compliance obligations will differ.

If you are new to the model, what is construction arbitrage explains how the operator wins the work, subcontracts the delivery, and keeps the spread.

What is the actual difference between a sole trader and a limited company in the UK?#

A sole trader and the business owner are the same legal entity. The business income is your income, and the debts belong to you personally.

A limited company is its own legal person. It pays corporation tax on its profits, files its own accounts, and can own assets in its own name. As a director and shareholder, you draw a salary and dividends from it. What the company owns, you do not personally own - and, in most cases, what the company owes is not your personal liability.

That liability protection sounds like the obvious winner. In practice, it matters less than it appears for a new operator. Most early commercial arrangements - trade credit accounts, some insurance policies, business loans - require a personal guarantee, which re-introduces your personal liability regardless of structure. The protection becomes meaningful once the business is large enough to operate without your personal signature on everything.

What does each cost to set up?#

Sole trader: Free. Register for Self Assessment with HMRC at gov.uk/register-for-self-assessment. No filing fee, no agent, no annual fee to maintain. You can trade from the day you register.

Limited company: £100 to register online at Companies House via gov.uk/limited-company-formation/register-your-company. Your company is normally active within 24 hours.

Ongoing obligations for a limited company that a sole trader does not have:

• Annual confirmation statement (fee at gov.uk/government/publications/companies-house-fees)
• Annual accounts to Companies House and a corporation tax return to HMRC
• A PAYE scheme if you pay yourself a salary - which most directors do

Those filing requirements are manageable but time-consuming. Most limited company directors in this model use an accountant. Budget somewhere in the range of £1,000-£2,500 a year for a small construction arbitrage limited company versus £400-£900 for a sole trader using an accountant for self-assessment. Your actual numbers will depend on the firm you use and the volume of transactions.

How do the tax bills compare?#

This is where the structural choice really matters - and where an accountant earns their fee.

As a sole trader#

Your profits are taxed as personal income through Self Assessment. The personal allowance for 2026-27 is £12,570 - below that, no income tax. Above it, you pay 20% (basic rate) up to the higher rate threshold of £50,270, then 40% above that.

You also pay Class 4 National Insurance contributions on profits above the lower profits limit. Check the current rate at gov.uk/self-employed-national-insurance-rates.

For a construction arbitrage operator with £40,000 profit, expect a combined income tax and NI bill somewhere in the region of £6,000-£8,000, depending on allowable expenses. Sole trader taxation is simple. What you earn, you pay tax on.

As a limited company director#

The company pays corporation tax on its profits: 19% on profits up to £50,000 (the small profits rate), 25% on profits above £250,000 (the main rate), with marginal relief on profits between those two figures. Source: gov.uk/corporation-tax-rates.

Most directors pay themselves a salary roughly equal to the National Insurance secondary threshold - currently in the range of £9,000-£12,000 per year - which keeps both income tax and NI to a minimum. Remaining profits are drawn as dividends.

Dividends are taxed at lower rates than income. From April 2026, the dividend tax rates are 10.75% for basic rate taxpayers and 35.75% for higher rate taxpayers, with the first £500 each year covered by the dividend allowance. Source: gov.uk/tax-on-dividends.

At £40,000 profit, the tax saving through a limited company can be in the hundreds to low thousands of pounds annually, depending on your expenses and the accountancy cost. At £80,000 and above, the saving usually justifies the overhead comfortably.

Run these numbers with an accountant before incorporating. The calculation is specific to your total income, expenses, and how much you want to retain inside the business versus draw out.

Does structure affect CIS, VAT or insurance?#

No. These obligations apply to what you do, not how your business is registered.

CIS: The Construction Industry Scheme requires you to register with HMRC as a contractor before you make your first payment to a subcontractor for construction operations. This applies equally to sole traders and limited companies. Verify each sub with HMRC, make the correct deductions (20% for registered subs, 30% for unregistered), and file monthly returns by the 19th of the following month. Register at gov.uk/what-is-the-construction-industry-scheme. Failure to register is not a grey area - penalties start immediately.

VAT: The registration threshold is £90,000 of taxable turnover in any rolling 12-month period, regardless of structure. Once you cross it, you must register. Source: gov.uk/register-for-vat. The domestic reverse charge for construction services - which applies between VAT-registered businesses within the scope of CIS - works the same way whether you are a sole trader or a limited company.

Insurance: Public liability insurance requirements are the same. The insurer notes your structure and your turnover; the cost difference between sole trader and limited company cover is typically small for a new operator.

Which structure fits where you are right now?#

Sole trader suits year one because it is free to set up and simple to maintain. You can still take larger contracts, sign main contractor agreements, and run a professional operation as a sole trader. The how to start a contractor arbitrage business from scratch guide assumes this as the starting structure.

A limited company suits growth and specific contracts. Three clear triggers to consider switching:

1. Profits are consistently above £35,000-£50,000 a year and the tax saving clearly exceeds the extra accountancy cost.
2. A housing association, local authority, or large property manager requires limited company status for their approved contractor or maintenance framework list. This happens more than people expect - it is worth asking early in those conversations.
3. You want to bring in a business partner. Shared shareholding, profit splits, and eventual exit are all cleaner through a limited company structure than a sole trader arrangement.

There is no rush to the second structure. The transition from sole trader to limited company is well-understood in the UK and a competent accountant can handle it without disrupting the business.

One thing that applies regardless of structure#

Register for CIS before you pay your first subcontractor. Not after the first job, not once things are running - before the first payment. The same goes for getting public liability insurance in place before you quote your first job.

Those two obligations do not wait on which business structure you choose. For a fuller picture of what compliance looks like in practice, see is contractor arbitrage legal in the UK and how taxes work in construction arbitrage.

The Construction Arbitrage Players community on Skool is where UK operators at this exact stage - picking a structure, getting the first sub, landing the first client - are currently working through these questions. It is practical rather than theoretical.

Frequently asked questions#

Should I start as a sole trader or limited company for contractor arbitrage in the UK? Start as a sole trader. It costs nothing to set up, the admin is simpler, and you are not locked in. Once your profits consistently clear around £35,000-£50,000 a year, run the numbers with an accountant - at that level, a limited company usually saves money through the salary-plus-dividends structure. Most operators make the switch in year two or three.

How much does it cost to set up a limited company in the UK? £100 to register online via Companies House, with your company usually active within 24 hours. On top of that, you pay an annual confirmation statement fee (check the current amount at gov.uk/government/publications/companies-house-fees), file annual accounts, and run a PAYE scheme if you pay yourself a salary. Most directors use an accountant for these - budget for that overhead before committing to the structure.

Does CIS registration work differently for sole traders versus limited companies? No. The Construction Industry Scheme obligation is identical for both structures. If you pay subcontractors for construction operations in the UK, you must register with HMRC as a CIS contractor before making your first payment. The structure does not change when you must register, how you verify subs, or when monthly returns are due.

Does a limited company protect me personally from construction arbitrage liabilities? In theory yes - a limited company keeps your personal assets separate from business debts and third-party claims. In practice, most new operators give personal guarantees when opening trade accounts or taking business credit, which removes that protection in those specific cases. The protection is more meaningful once the business grows beyond needing your personal signature on every commercial arrangement.

When should I switch from sole trader to limited company? Three clear triggers: profits consistently above £35,000-£50,000 a year; a client such as a housing association or local authority requires limited company status for their approved contractor list; or you want to bring in a business partner and need a clean shareholding structure. If none of those apply yet, stay sole trader and build the business first.

Last checked: 31 August 2026.