How To Turn Your Idea Into A Business
15th December, 2025
Many people dream of turning their passion into a business. For some, it is about bringing a long-held idea to life. For others, it may be the opportunity to transform a hobby into a rewarding profession. This month, we are focusing on the practical steps involved in setting up a business in the UK and, importantly, the tax implications of the choices you make at the outset.
Understanding the difference between operating as a sole trader and forming a limited company can help you plan more effectively and minimise unnecessary costs.
When starting out, most people begin as sole traders, as it is the simplest and most cost-effective structure.
As the business grows, many then decide to incorporate as a limited company, which offers certain protections and can be more tax-efficient.
| Feature | Sole Trader | Limited Company |
|---|---|---|
| Legal Identity | Not separate from the owner | Separate legal entity |
| Liability | Unlimited – personal assets at risk | Limited – liability restricted to company assets |
| Tax | Income Tax via Self Assessment | Corporation Tax is applied to profits after salary and expenses. Directors can take a combination of salary and dividends |
| Administration | Simple and low cost | More complex, higher compliance costs |
| Privacy | Personal details remain private | Director information published at Companies House |
As a limited company, you will pay Corporation Tax on your profits after allowable business expenses, including any salary paid to directors. The current Corporation Tax rates are:
- 19% on profits up to £50,000
- Marginal relief on profits between £50,001 and £250,000
- 25% on profits above £250,000
Many directors choose to take a combination of salary and dividends, as this can be more tax-efficient than taking all income as salary. As a sole trader, your profits are subject to Income Tax and Class 2 and Class 4 National Insurance contributions, paid through the Self Assessment system.
Costs to Consider Before You Begin
Starting a business involves more than just enthusiasm. It is sensible to budget for key expenses, which may include:
- Income Tax and National Insurance contributions
- Professional advice, both legal and financial
- Marketing and promotional materials
- Premises, licences, insurance and business rates
- Essential items such as stationery, stock and vehicles
Once you have considered these costs, it is also worthwhile to research your competitors. This will help you set realistic pricing and ensure your business remains competitive from the outset.
Setting Up As A Sole Trader
For those starting small, becoming a sole trader is often the most accessible route. To get started, you will need to:
- Keep accurate records of all business sales and income, business expenses, VAT if registered, PAYE if you employ staff, and details of your personal income.
These records should run from 6 April to 5 April each year in line with the HMRC tax year, and must be retained for at least five years.
Register as a sole trader through the Self Assessment system if any of the following apply:
- You earn more than £1,000 in a tax year (6 April to 5 April)
- You need to prove self-employment status, for example, to claim Tax-Free Childcare
- You wish to make voluntary Class 2 National Insurance contributions to help build entitlement to benefits and State Pension
- You are required to register under the Construction Industry Scheme (CIS) or as a share fisher
National Insurance Contributions
From 6th April 2024, most self-employed people no longer need to pay class 2 National Insurance contributions.
However, those with profits below £6,725 can still choose to pay Class 2 voluntarily to maintain their entitlement to the State Pension and certain benefits. These payments are made through your Self-Assessment return.
If your profits are more than £12,570 a year, you must pay Class 4 contributions.
For tax year 2025 to 2026, you’ll pay:
- 6% on profits over £12,570 up to £50,270
- 2% on profits over £50,270
In Summary
Deciding whether to start as a sole trader or form a limited company is an important first step in your business journey. Each option carries different obligations and tax consequences, so understanding these before you begin will place you in a stronger position.
Our team is here to support you at every stage, from the initial set-up through to long-term planning. If you would like to discuss the most suitable structure for your business and the tax implications involved, please do get in touch.
Disclaimer: This article is for informational purposes only and does not constitute tax, accounting or legal advice. For guidance specific to your situation, we recommend speaking with a qualified professional.
