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If you’re starting your own construction business, one of the first big decisions you’ll need to make is whether to operate as a sole trader or a limited company. And for those in the construction industry—where cash flow, compliance, and contracts are key—understanding the pros and cons of each option is especially important.
The structure you choose will affect everything from how you pay tax and get paid, to how much personal risk you take on. So, in this guide, Holly Bracey, Client Manager in our Business Advisory team explains what you need to know to choose the best setup for you.
Limited Company or Sole Trader?
There are a few factors to consider when deciding which is the right route for you:
- Limited liability – the key distinction is that a limited company is a separate legal entity, which means in the eyes of the law, there’s a difference between the person running the business and the business itself. Should the business incur losses – operating as a limited company provides more protection than operating as a sole trader.
- Administrative burden (and costs) – as a sole trader, you’ll need to submit a personal tax return to HMRC each year – although depending on your annual turnover Making Tax Digital for Income Tax will change this process over the next 3 years to more regular digital reporting and tax payments.
Limited companies must submit annual accounts and a Confirmation Statement to Companies House as well as a corporation tax return to HMRC. And Directors of limited companies will also usually need to file a personal tax return. These additional filing requirements typically mean higher accountancy costs for a limited company.
There are also other requirements, covered later in this guide, that apply to both sole traders and limited companies.
- Tax – sole traders pay income tax on their business profits, whereas limited companies pay corporation tax on their business profits. The directors of limited companies will also pay tax on the money they extract from the business, usually in the form of salary or dividends.
The most tax-efficient option for you will depend on several factors, including any income you receive outside the business. Tailored professional advice really helps here to run the necessary calculations for your unique circumstances. What works for one person may not work for someone else.
You can transition from a sole trader to a limited company via incorporation at a later date, as well as disincorporate a limited company, should you wish to.
What Records to Keep?
Record-keeping is an important part of being a business owner, but it doesn’t have to mean keeping physical books. Most businesses opt to maintain their records using digital software such as Xero.
You’ll need to keep records of:
- All sales and income
- All business expenses
- VAT records if you’re registered for VAT
- PAYE records if you employ people
- Records about your personal income
It’s important to keep records as early in your journey as possible.
You may even be able to get tax relief on costs you incurred before you started trading.
Software allows you to keep this all-in-one place; including digital copies of invoices and receipts, so you don’t need to keep the paper ones.
What Expenses to Claim
As a sole trader, you can claim business expenses when you file your self-assessment tax return.
HMRC’s rule is that these must be ‘wholly and exclusively’ for the business. But there’s a wide range of expenses you can claim for, such as:
- Materials purchased to either use or sell
- Staff expenses including subcontractors
- Office costs e.g. stationery
- Travelling expenses
- Uniforms and protective clothing
The following are not allowable expenses:
- Entertaining clients, suppliers and customers
- The cost of preparing and submitting your self-assessment tax return
- Fines and penalties such as parking tickets
If you use something for both personal and business purposes, such as your phone, you can claim the percentage you use it for business.
Alternatively, you can claim the £1,000 trading allowance, which may be beneficial if you’re providing labour-only work or are just starting out and have few costs.
Construction Industry VAT
You can register for VAT at any time. However, registration becomes compulsory once your VAT-able turnover for the past 12 months exceeds the current threshold of £90,000.
It’s important to monitor your turnover carefully to avoid accidentally going over the limit, as late registration can lead to penalties.
That’s why some businesses in the construction industry choose to register voluntarily before they reach this threshold. Their services are often zero-rated for VAT (such as building new homes), while the materials they purchase are subject to VAT. So, by registering, they can reclaim the VAT on those materials — a helpful boost to cash flow.
When you first register for VAT, you may be able to reclaim VAT on costs incurred before registration — including services from the previous six months, and assets you still hold that were purchased in the past four years.
Contractor or Sub-contractor?
As a contractor you’re hired directly by a client to manage and oversee a project. As a subcontractor you’re hired by the contractor to perform specific tasks within that project.
It will depend on your skills and business focus as to which best suits you, but you may end up as both. Either way The Construction Industry Scheme (CIS) can affect you.
You can find out more about how this impacts contractors here A Contractors Guide to the Construction Industry Scheme (CIS) – Scrutton Bland
Subcontractors must provide their details to contractors for verification. If a subcontractor cannot be verified, contractors must deduct tax at a higher rate of 30%, instead of the standard 20%.
Subcontractors who meet certain criteria can apply for Gross Payment Status, allowing them to receive full payments without deductions — a significant cash flow advantage.
When it comes to filing tax returns, subcontractors who are sole traders can offset any CIS deductions already made against their tax bill. If more tax has been deducted than they owe, they may receive a refund from HMRC.
Insurance
There are several types of insurance to consider, and it’s important to choose the policies that best suit your business needs.
- Personal insurance – As a business owner, it’s important to think about how you’d manage if you were unable to work due to illness or injury. Options include income protection insurance, life insurance, and critical illness cover.
- Public liability insurance – Essential for construction businesses, this covers claims made by members of the public for injury or damage to property caused by your work.
- Professional indemnity insurance – Often required as part of client contracts, this protects your business against claims of professional negligence or mistakes in your work.
- Employers’ liability insurance – Legally required once you hire employees, this covers claims from employees who are injured or become ill as a result of their work.
Banking and Getting Paid
One of the biggest hurdles when launching your own business is managing cash flow.
Although not required, it’s highly recommended for sole traders to have a dedicated business bank account. It helps to separate your business and personal finances and will make it easier to track your business income and expenses.
A crucial first step is issuing clear, professional invoices. Staying proactive with outstanding invoices and keeping track of payments due is essential to make sure you get paid on time.
Impact of National Insurance and National Minimum Wage Changes
If you decide to grow your business and hire staff, you must ensure you’re paying at least the National Minimum Wage. From 1 April 2025, this rose to £12.21 per hour for employees aged 21 and over.
In the construction industry, it’s also common to employ apprentices, who are entitled to a minimum wage of £7.55 per hour.
The 2024 Autumn Budget announced an increase in employers’ National Insurance Contributions (NICs) from 13.8% to 15%, effective from 6 April 2025. However, if your business is eligible, the Employment Allowance can reduce your annual National Insurance bill by up to £10,500, which will potentially offset some of this cost.
Staying on Top of Your Accounts
Whether you decide to set up as a sole trader or a limited company, we can help by taking care of your accounts.
Our team of construction sector specialists regularly advise a wide range of owner managed businesses across the industry with everything from tax planning to cash flow management.
Get in touch with Holly or one of the team today to find out how we can help by calling 0330 058 6559 or email hello@scruttonbland.co.uk
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