The situation
In early 2024, a digital agency founder we’ll call Tom was running a successful solo operation from a co-working space in Shoreditch. His agency specialised in Klaviyo email automation and Shopify conversion optimisation for DTC brands. By September, his revenue was on track to hit £180,000 for the tax year, a figure that had crept up from £95,000 the previous year, and £62,000 the year before that.
Tom was a sole trader, using FreeAgent for bookkeeping and Float for cash flow forecasting. He had one part-time VA and two freelance copywriters on retainers. His clients were mostly UK-based, with one US brand paying in dollars. He was profitable, cash-rich, and growing fast, but his accountant had been gently nudging him for months: “You need to think about incorporating.”
The problem was timing. Tom had always assumed you incorporated at the start of a tax year, April 6th, to keep things simple. But his accountant explained that mid-year incorporation was not only possible, but often more tax-efficient when you were crossing the £100k–£200k profit threshold. By late September 2024, Tom had already earned £140,000 in net profit as a sole trader. The remaining £40,000 of projected earnings for the year would fall into the new company.
Tom’s personal tax position was straightforward: single, no children, renting in London, no other income. His only significant tax planning concern was that his sole trader profits were pushing him into the 40% income tax bracket, and he was paying 9% Class 4 NIC on top. He felt the sting every time he filed his self-assessment.
The decision
Tom’s core question was simple: Should he incorporate on 1 October 2024, or wait until April 2025?
He had three concerns:
- Would the administrative hassle of a mid-year switch be worth the tax saving?
- Could he legally transfer ongoing client contracts and work-in-progress to the new company without triggering a VAT or income tax issue?
- Would the timing affect his ability to claim Entrepreneurs’ Relief (now Business Asset Disposal Relief) on a future sale?
His accountant ran the numbers on three scenarios: incorporate in October 2024, incorporate in April 2025, or stay as a sole trader for another full year. The answer was clear, but only if Tom was willing to act before the end of the calendar year.
What we modelled
We built a cash-flow model in Excel, using Tom’s actual September 2024 year-to-date figures and his projected pipeline for the next 12 months. The key assumptions were:
- Sole trader profit (April–September 2024): £140,000
- Projected profit (October 2024–March 2025): £40,000
- Projected profit (April 2025–March 2026): £200,000 (full first year as Ltd)
- Tom’s salary: £12,570 per year (personal allowance) from the Ltd company
- Dividends: drawn quarterly, targeting basic rate band
Scenario A: Incorporate 1 October 2024
Tom would pay income tax and Class 4 NIC on the £140,000 sole trader profit at his marginal rate (40% + 9% = 49% on most of it). That gave a sole trader tax bill of roughly £56,000. The new company would pay 19% corporation tax on its first £40,000 of profit (£7,600). Tom would take a £12,570 salary (no employer NIC due below secondary threshold) and draw dividends up to the basic rate band. Total tax for the 12 months to September 2025: approximately £67,000.
Scenario B: Incorporate 6 April 2025
Tom would pay income tax and NIC on the full £180,000 sole trader profit for 2024/25, a tax bill of roughly £74,000. The company would then start fresh in April 2025, paying 19% CT on its first £50,000 of profit, then 25% on the rest. Total tax for the 12 months to March 2026: approximately £82,000.
Scenario C: Stay sole trader
Tom would pay income tax and NIC on £180,000 for 2024/25, then on a projected £220,000 for 2025/26. Total two-year tax bill: roughly £168,000. No corporation tax, no dividend tax, but also no ability to retain profits in the company for future investment.
The October incorporation saved Tom approximately £11,000 in the first 12 months compared to waiting until April. The saving came from three sources: lower corporation tax on the first £40,000 of profit (19% vs 49% personal rate), the ability to use the personal allowance twice in one tax year (once as a sole trader, once as a director), and the dividend allowance (£500) being available to the company.
The outcome
Tom incorporated on 1 October 2024. The process took four working days via Companies House and his accountant’s formation service. He opened a business bank account with Starling, transferred his FreeAgent subscription to the company, and novated his key client contracts with a simple letter of assignment.
The VAT registration was a minor headache, Tom had been below the £90,000 threshold as a sole trader, but the company’s projected turnover meant he registered for VAT from day one. He opted for the Flat Rate Scheme at 16.5% (limited cost trader) to simplify things.
By March 2025, the company had turned over £210,000 (the £40,000 projection was conservative, he won two new retainers in November). Corporation tax for the first six months came to £7,980. Tom paid himself the £12,570 salary and took £37,700 in dividends (staying within the basic rate band). His personal tax liability for 2024/25 was £56,000 on the sole trader portion, plus £2,300 in dividend tax, a total of £58,300.
Compared to Scenario B (incorporating in April), Tom saved £11,200 in tax and NIC in the first 12 months. He also retained £38,000 of profit in the company, which he used to hire a full-time junior developer in January 2025, something he couldn’t have done as a sole trader without taking on personal debt.
One unexpected benefit: the company structure made it easier to onboard the US client, who preferred invoicing a Ltd company over a sole trader. Tom also found that applying for a business credit card (Capital On Tap) was straightforward with the company’s strong early revenue.
What others can learn
- Mid-year incorporation is often more tax-efficient than waiting for April. If your sole trader profits are pushing you into the 40% or 45% bracket, incorporating mid-year lets you divert future earnings into a company where they’re taxed at 19% or 25%, and you can use your personal allowance twice in one tax year.
- The £90,000 VAT threshold is a trigger point, not a barrier. If your company’s projected turnover exceeds £90,000 in its first 12 months, you must register for VAT from day one. Factor this into your pricing, either absorb the VAT or adjust your rates.
- Novation of contracts is straightforward if done properly. A simple letter signed by you, your client, and the new company is usually enough. Most clients don’t mind, they’re invoicing a company instead of an individual, which often feels more professional.
- Don’t forget the dividend allowance. It’s only £500 for 2025/26, but if you time your first dividend payment correctly, you can use it in two different tax years, once as a sole trader drawing profits, and once as a company director.
- Business Asset Disposal Relief (BADR) clock starts on incorporation. If you plan to sell the agency in future, the 14% CGT rate (2025/26) requires you to have held the shares for at least two years. Incorporating earlier starts that clock ticking, another reason not to wait.