March 6, 2026

Switching from a sole trader to a micro entity (a private limited company) is a straightforward process, but it does involve a few important legal, tax, and administrative steps. In short, you need to incorporate a limited company through Companies House, transfer your business activities across, and inform HMRC of the change. This guide walks you through every step without confusing jargon, and no unnecessary complexity. What is the Difference Between a Sole Trader and a Micro Entity? Before making the switch, it helps to understand what each structure actually means and why so many small business owners end up making this change. What is a Sole Trader? A sole trader is the simplest form of self-employment in the UK. You run the business as an individual, and there is no legal separation between you and the business. You keep all the profits, but you are also personally responsible for all the debts. You register with HMRC for Self Assessment and pay Income Tax and National Insurance on your earnings. What is a Micro Entity? A micro entity is a very small private limited company. Companies House classifies a company as a micro entity if it meets at least two of the following three conditions: Annual turnover of no more than £1M Balance sheet total of no more than £500,000 No more than 10 employees As a micro entity, you can file simpler, abbreviated accounts with Companies House and benefit from reduced Corporation Tax rates compared to Income Tax rates that sole traders often face at higher earnings. Should You Switch From Sole Trader to Micro Entity? Not everyone needs to make this move. But there are some clear signs it might be the right time for you. When Does It Make Financial Sense? The main financial reason to switch is tax efficiency. As a sole trader, you pay Income Tax on all your profits, which means 20% on profits between £12,571 and £50,270, and 40% on anything above that. You also pay Class 4 National Insurance at 9% up to £50,270. As a limited company director, the company pays Corporation Tax on its profits (currently 19% for profits under £50,000 as of the 2024/25 tax year). You can then pay yourself a mix of a low salary and dividends, which can significantly reduce your overall tax bill. Most accountants suggest that switching becomes worthwhile once your annual profit consistently exceeds £30,000 to £35,000. Below that level, the extra admin costs can outweigh the tax savings. What Are the Other Reasons to Make the Switch? Beyond tax, there are other good reasons to consider incorporating: Limited liability: your personal assets are protected if the business runs into debt or legal trouble More professional image, some clients and larger businesses prefer to work with limited companies Easier to bring in business partners or investors later on You can retain profits in the company and only draw what you need, which gives you more control over your personal tax position How Do You Switch From Sole Trader to Micro Entity – Step by Step? Here is a clear, step-by-step breakdown of what the process looks like from start to finish. Step 1: Choose a Company Name and Check Availability Before you register, you need to choose a company name. You can search for available names on the Companies House name availability checker at gov.uk. The name must not already be in use, cannot be offensive, and must end with ‘Limited’ or ‘Ltd’. You do not have to use the same name as your sole trader business. Many people choose to keep continuity, but this is entirely up to you. Step 2: Register the Company With Companies House You can register your limited company online at gov.uk. The registration fee is £50 (as of 2024), and most applications are processed within 24 hours. During registration, you will need to provide: Your company name and registered address Details of at least one director (this can be you) Details of shareholders and the share structure A memorandum and articles of association (standard templates are available) Once registered, you will receive a Certificate of Incorporation with your unique Company Registration Number (CRN). You are now officially a micro entity limited company. Step 3: Open a Business Bank Account for the New Company Your limited company is a legally separate entity from you as an individual. It must have its own bank account. Do not mix company money with your personal or old sole trader finances. Most high street banks and newer digital banks (like Starling, Tide, or Monzo Business) offer business accounts with quick setup times. You will need your CRN and Certificate of Incorporation to open one. Step 4: Notify HMRC and Close Your Sole Trader Registration This is a step many people overlook, and it can cause problems if not done properly. Here is what you need to do: Complete and submit your final Self Assessment tax return as a sole trader (covering your earnings up to the date you stopped trading as a sole trader) Pay any outstanding Income Tax and National Insurance Notify HMRC that you have stopped being self-employed. You can do this via your online HMRC account or by calling HMRC directly If you were VAT registered as a sole trader, you will need to deregister and then re-register under the new company (or transfer the registration, check with HMRC if this is appropriate for your situation) You must then register the new limited company for Corporation Tax within three months of starting to trade. You can do this online through HMRC’s Government Gateway. Step 5: Transfer Your Business Assets and Contracts Your sole trader business and your new limited company are legally separate. This means you need to formally transfer business assets — such as equipment, intellectual property, or ongoing client contracts — from yourself to the company. Key things to consider during the transfer: Existing contracts, contact clients and suppliers to inform them of the change and