Sole trader or limited company?

Are you considering changing your business structure from sole trader to limited company? There are many factors that need to be thought about, such as your personal circumstances, the size of your business, your attitude to risk and your growth ambitions.

It is a decision that requires careful consideration and it is advisable to seek tailored advice from accountancy services and financial consultants who can provide tailored business models and projections based on your individual and personal circumstances. This helps you to have a clear understanding of the benefits and implications of both options, ensuring that you can make an informed decision.

For a childcare business, the main tax considerations are about income tax vs corporation tax, how you pay yourself, home use and car use rules, and what happens when you move your sole trader business into a limited company. The choice of whether to be a sole trader or a limited company could fundamentally affect personal liability, compliance requirements, growth potential and tax position.

Tax and finance implications

Sole traders pay Income Tax on their profits. The current rates can be found here: Income Tax rates and Personal Allowances: Current rates and allowances – GOV.UK. For the tax year 2025-2026 the basic rate for income between £12,571 and £50,270 is 20%, the higher rate for income between £50,271 and £125,140 is 40% and the additional rate for income of £125,140 is 45%. You will also have to pay National Insurance contributions on your profits if you meet the threshold. Full details can be found here: Self-employed National Insurance rates – GOV.UK. The simplicity of this structure can be appealing for childminders, especially when they are starting out or only caring for a small number of children.

Limited companies pay Corporation Tax on their profits. You can find full details here: Corporation Tax rates and reliefs: Rates – GOV.UK. In 2025-2026 if a company has profits of £50,000 or less, they pay the small profits rate of 19%. For profits over £50,000 the rate is 25%.

Setting up as a sole trader is relatively simple and you retain all the profits made after tax. As a sole trader you can take money out of your business at any time. Sole traders need to file their annual Self-Assessment return. Those who are mandated to use Making Tax Digital will also need to submit quarterly.

Accounting for a limited company is more complex. The limited company is separate to the directors, so even if you are the only director, you can only take money out of the business by paying yourself a salary and/or dividends. Importantly you can only take out dividends when the business is taking a profit and there are several rules and administrative activities that you must undertake if you choose to pay dividends to the company directors. You can find full details here: Running a limited company: your responsibilities: Taking money out of a limited company – GOV.UK.

Limited companies will need to file company accounts and the childminder, as the company director, will also have to submit a personal Self-Assessment. Although Making Tax Digital is not currently being introduced for limited companies, as HMRC continue to digitise their systems, it may become mandated in the future.

Sole traders are not required to share statutory accounts with HMRC and Companies House, but limited companies are required to do this. This could include the need to prepare a balance sheet, a profit and loss report, notes about the account and a director’s report.

It is also important to talk to the local authority early years entitlements team about the implications in changing your business structure. Without careful planning you could be at risk of receiving the funding late or even missing out on receiving some funding over the transition period if the move across to a limited company is not seamless.

Banking requirements

As a limited company you will need to open a business bank account, even if you have been previously using a personal account as a sole trader. This is because the company is legally separate to you as an individual, and so business finances need to be kept separate to personal finances.

For sole traders this is not a legal requirement, but it can still be beneficial to have a separate account, even if it is another personal account. When it comes to submitting your tax return having a separate account can also be helpful as it will clearly show your childminding income and expenses without the confusion of your personal transactions.

Compliance considerations

In England, the post from Ofsted in November 2025, clearly states that if you change your legal entity, for example moving from a sole trader to a limited company, you will need to register again.

This will require you to pay a new registration fee, as well as paying for your GP to sign your health declaration form and possibly repaying for a DBS for yourself and all other adults in your house (unless you are all on the update service).

In Wales, CIW state that a childminders registration will always be in the childminder’s own name. This is because the activity is that of a personal service provided on domestic premises, normally in the childminder’s own home and the regulations do not make any provision for companies to register, unlike day care. However, there does not seem to be any reason why a childminder in Wales could not organise their financial affairs so that the contracts with parents were made with a company and the fees were paid to the company. If a childminder uses a trading name or company name in his or her Statement of Purpose this should not raise a problem for CIW. The fact that a childminder trades through a company does not alter the need for the registration to be in his or her personal name. This means that, in Wales, re-registration as a company would not be required, just a Statement of Purpose notification so that details about the change of circumstance and role of the company are clear to all.

As well as the regulatory compliance requirements with Ofsted, childminder agency, or CIW you will also need to consider business compliance requirements.

There are more compliance requirements for limited companies than for sole traders. Limited companies are legally required to write articles of association. This is a ‘rulebook’ that explains how a company will run. It should include internal governance, directors’ responsibilities and shareholders rights. It is advisable to get legal advice and guidance to support you in creating this.

Planning permission

Generally, a single childminder working on their own with up to 6 children do not require planning permission. To run a limited company from home, you may need planning permission if doing so results in a material change in the use of the property. This could include a marked rise in the traffic or people calling at your house, or if it disturbs your neighbours at unreasonable hours. In all instances it is advisable to contact your local planning department for specific guidance and to understand if your business activities fall within the scope of planning permission requirements. You can find further guidance here: Running a business from home – GOV.UK.

If you have a mortgage you will need to contact your mortgage provider to ensure that you are allowed under the terms of the mortgage to run a business from your home. Similarly, if you have a landlord, you will need to seek permission from them to run a business from the property.

Although childminders do not generally need to pay business rates, depending on the circumstances and size of your business, becoming a limited company may result in you needing to pay business rates as well as council tax. To find out if you should be paying both you will need to contact the Valuation Office Agency (VOA).

Liability considerations

As a sole trader, you and your business are the same legal entity. This means that your personal assets (including your home) are at risk if your business faces legal claims or financial difficulties. With the stringent regulatory requirements and safeguarding concerns of the childcare sector, this does represent a significant consideration.

As a limited company the business is a separate legal entity. This means liability lies with the company rather than you as an individual, so protecting your personal assets and leaving you only liable for company debts in the case of director misconduct.

Key takeaways

Consider converting to a limited company when your annual profits exceed £50,000, as Corporation Tax rates (19-25%) become more favourable than Income Tax rates (20-45%) for sole traders. Lower profit levels can mean that being a sole trader is advantageous due to simpler administration and lower tax burden.

As profits increase being a limited company can be beneficial. For example, it can be tax efficient for the business owner to pay themselves a small salary (within the personal allowance) and dividends, rather than paying higher rate Income Tax as a sole trader.

Recognise that limited company status protects your personal assets from business debts by creating a separate legal entity but requires increased administration including public financial records and more complex filing requirements.

Utilise accounting software to manage the increased bookkeeping and reporting requirements that come with limited company status, including company accounts, Corporation Tax returns, and payroll if you have employees.

Simply stated you should consider switching from sole trader to limited company when tax efficiency, liability protection, or business growth outweigh the added admin.

Step-by-step process for incorporation

In England and Wales, you don’t ‘convert’ from a sole trader into a company. Rather you stop being a sole trader, set up a new limited company and then move everything across. This is called incorporation

Decide on timing and get professional advice
- Decide the date when you will stop trading as a sole trader and start trading as the company (often the start of a new tax month or year).

- Speak to an accountant about tax (Capital Gains Tax on assets, use of a director’s loan account, VAT, pensions, etc.) but also consider the requirements of your regulatory body (Ofsted, CMA or CIW).
Set up the limited company

- Choose a unique company name and check it is available.

- Decide directors and shareholders (you can be the only one) and who will have significant control.

- Prepare or use standard memorandum and articles of association (if you register online, a standard memorandum is created automatically).

- Register the company with Companies House online (often approved within 24 hours) and choose the correct SIC code (standard industrial classification) for your business, which is Child day-care activities – 88910.

- When the company is formed, you’ll receive a certificate of incorporation and HMRC will be notified, who will then send you the company’s Unique Taxpayer Reference.
In England, re-register with Ofsted as the business’ new legal entity or with your CMA if this is required. In Wales you do not need to register but you do need to add a note to your Statement of Purpose.
Register for Corporation Tax and PAYE
- Register the company for Corporation Tax (usually within 3 months of starting to trade although you do get the option to do this when you register with Companies House).

- If you are paying yourself or staff via salary, you will also need to register the company as an employer and set up PAYE.
Tell HMRC you’ve stopped being a sole trader
- Use HMRC’s “stop being self-employed” process and give the date you ceased as a sole trader.

- Complete a final Self-Assessment tax return as a sole trader, covering income up to that cessation date.
Transfer business assets and contracts
- Decide which assets (equipment and resources, vehicles, IP, website, goodwill, etc.) will move to the company, and at what value (often market value for tax purposes).

- Record the transfer formally, e.g. with a sale agreement or by crediting a director’s loan account (so the company “owes” you the value of assets transferred).

- Where relevant, talk to lenders or landlords about moving leases or finance agreements into the company’s name.

- Update or reissue contracts to the parents/carers that use your setting in the company’s name.
Open a company bank account and move operations
- Open a business bank account in the company’s name and start putting all income and expenses through it. This will include informing your local authority of your new bank details (and business name, if relevant) so you can receive the early years education entitlements.

- Move recurring payments (registration fees, professional memberships and subscriptions, insurance, software, utilities) and update direct debits and standing orders to the company account.
Notify all stakeholders
- Inform parents, the local authority who pay you the early years entitlement, insurers, your accountant, your bank, and any other platforms such as the ICO, that you now trade via a limited company.

- Update your invoices, website, email footer, stationery, and marketing materials to show the company’s full legal name, registered number, and registered office address.
Ongoing compliance as a company
- File annual accounts with Companies House and a Company Tax Return with HMRC every year.