For 2026/27, sole-trader status is simpler and cheaper at lower profit levels. A limited company usually beats sole trader on combined tax once profit exceeds approximately £30,000 to £50,000, because of the lower Corporation Tax rate (19% on profits up to £50,000) and the dividend-tax structure (8.75% basic rate, after a £500 dividend allowance). Above that level the limited company saves tax materially, but admin cost is higher and the structure is less flexible.
This guide gives you a quick decision summary, the 2026/27 tax differences, three worked examples at different profit levels, and the non-tax factors that often decide the call.
Quick decision summary
The rough rules:
- Profit below £30,000. Sole trader is usually simpler and broadly tax-equivalent. Lower admin cost.
- Profit £30,000 to £50,000. Closer call. Limited company tax saving starts to outweigh admin overhead, but only marginally.
- Profit above £50,000. Limited company usually wins materially on tax, especially where dividends are taken.
- Profit above £100,000. Limited company wins decisively.
Other factors (limited liability, perception with corporate clients, pension efficiency) often tip the decision regardless of pure tax mathematics.
Tax differences 2026/27
Sole trader
Sole traders pay income tax and Class 4 NI on trading profit:
- Personal allowance: £12,570 (tapered above £100,000)
- Basic rate (20% income tax): £12,570 to £50,270
- Higher rate (40%): £50,270 to £125,140
- Additional rate (45%): above £125,140
- Class 4 NI: applied on profits above the lower limit (verify 2026/27 specific rates)
Class 2 NI was abolished from 6 April 2024 for most self-employed people.
Limited company
A limited company is a separate legal entity. Tax operates in two layers:
- Corporation Tax on profits. 19% small profits rate up to £50,000; 25% main rate above £250,000; marginal relief between (effective rate roughly 26.5% on the marginal slice).
- Personal tax on extraction. When you take money out as salary or dividends, you pay personally.
Salary is deductible for Corporation Tax but creates employer NI cost (15% above the £5,000 secondary threshold). Dividends are not deductible for Corporation Tax but are taxed at lower personal rates than salary.
Dividend tax rates 2026/27:
- £500 dividend allowance — no tax on the first £500 of dividends
- 8.75% basic rate
- 33.75% higher rate
- 39.35% additional rate
The structure encourages mixing a small salary (typically up to the personal allowance) with the rest of profit taken as dividends.
Worked examples
Profit £30,000
Sole trader:
- Personal allowance £12,570 — nil tax
- Basic rate band: £30,000 − £12,570 = £17,430 × 20% = £3,486 income tax
- Class 4 NI on profit above the lower limit (verify rates) — approximately £1,200 (illustrative)
- Total approximate take-home: £25,300
Limited company:
- Corporation Tax on £30,000 at 19% = £5,700
- Profit after CT: £24,300
- Take-home as salary up to personal allowance + dividends:
- Salary £12,570 (uses personal allowance, no CT relief because below threshold; pays no employee NI but pays employer NI on slice above £5,000 = £1,135.50 — assume Employment Allowance not available for single-director)
- Dividend £24,300 − employer NI cost is more nuanced; for illustration, after CT and employer NI on salary slice, available dividend pool is roughly £23,200
- Dividend tax: first £500 free, next £22,700 at 8.75% = £1,986 (some falls outside basic rate at this level)
- Total approximate take-home: £25,500
At £30,000 profit, the two are essentially level. Limited has slight edge after careful structuring; admin cost wipes out the saving for many.
Profit £60,000
Sole trader:
- Income tax: about £11,432
- Class 4 NI: approximately £2,400
- Total approximate take-home: £46,200
Limited company:
- Corporation Tax: £60,000 × 19% (within small profits) = £11,400
- After CT: £48,600
- Salary £12,570 + dividends £36,000 (after employer NI consideration)
- Dividend tax: roughly 8.75% on the basic-rate slice and 33.75% on the higher-rate slice
- Total approximate take-home: £49,000
Limited company saves around £2,800 a year at £60,000 profit — material, and likely worth the admin overhead for most.
Profit £100,000
Sole trader:
- Income tax: about £27,432
- Class 4 NI: approximately £3,600
- Total approximate take-home: £69,000
Limited company:
- Corporation Tax: £100,000 small profits rate = £19,000
- After CT: £81,000
- Salary £12,570 + dividends £68,000 (illustrative)
- Dividend tax mix: approximately £14,500 effective
- Total approximate take-home: £71,500
Limited company saves around £2,500 to £3,000 at this level. Personal pension contributions through the employer route can add several thousand of additional tax efficiency that sole traders cannot match.
(These illustrations approximate the comparison; actual figures depend on Class 4 NI rates, dividend mix, and Employment Allowance availability. Verify with current rates before relying on specific numbers.)
To run the numbers for your own situation, use our limited company vs sole trader calculator.
Liability protection
A limited company is a separate legal entity. Shareholders’ liability is limited to the unpaid value of their shares (usually £1 per share for a typical small company). Trading debts of the company do not become personal debts of the shareholder, except where:
- A director has given a personal guarantee (very common on SME bank borrowing)
- Wrongful or fraudulent trading has occurred
- Specific tax liabilities (some PAYE and VAT) can pierce the veil in extreme cases
Sole traders have unlimited personal liability — business debts are personal debts. This matters more in industries where trading is risky (construction, property development) or where supplier credit is significant.
Admin and filing
Limited companies have substantially more admin:
| Filing | Sole trader | Limited company |
|---|---|---|
| Self Assessment | Yes | Yes (for director if dividends) |
| Companies House annual accounts | No | Yes |
| Companies House confirmation statement | No | Yes (£50/year) |
| Corporation Tax return | No | Yes |
| RTI / PAYE | If employing | Yes (for director salary) |
| Statutory registers | No | Yes |
Annual accountant fees for a small Ltd typically run £600–£1,500 versus £200–£500 for a sole trader. MTD ITSA is rolling out from April 2026 for sole traders in phases, narrowing some of the admin gap.
Other practical factors
Five non-tax considerations:
- Bank lending and supplier credit perception. Many B2B clients and lenders perceive limited companies as more substantial. Some procurement gates require a limited company structure.
- Pension contributions. A limited company can make employer pension contributions deductible for Corporation Tax with no personal income tax cost. Sole traders pay personal pension contributions from after-tax income with personal-tax relief, which is less efficient.
- Salary sacrifice. Available only to limited companies (sacrificing salary into pension or other benefits).
- Director loan account. Limited companies have flexibility around director loans, though section 455 tax charges apply to overdrawn loans at year-end.
- IR35 / off-payroll working. If you provide services to a single client through a limited company, IR35 rules may apply, removing much of the tax efficiency. Sole traders are usually outside IR35.
How to switch
If you are a sole trader and want to incorporate, you can transfer the trade and assets to a new limited company. Key tax considerations:
- Incorporation relief. TCGA 1992 section 162 allows roll-over of capital gains tax on goodwill into the new shares.
- Goodwill. The valuation of goodwill at incorporation is sensitive; HMRC routinely challenges high values.
- VAT continuity. TOGC (transfer of going concern) treatment can avoid VAT on the asset transfer.
Take advice before incorporating. A poorly-structured incorporation can create unexpected tax bills.
Key takeaways
- Sole trader simpler and cheaper at lower profits; limited company wins on tax above approximately £30,000 to £50,000
- Corporation Tax 19% (small) / 25% (main) / marginal between £50,000 and £250,000
- Dividend tax 8.75% / 33.75% / 39.35% with £500 allowance
- Limited liability is real but routinely punctured by personal guarantees on borrowing
- Limited company admin costs typically £600–£1,500/year extra
- Pension efficiency strongly favours limited companies via employer contributions
Frequently asked questions
At what profit level should I switch from sole trader to limited? Generally above £30,000 to £50,000 of profit, though the exact level depends on your dividend mix, pension contributions, and admin tolerance. Below £30,000 the simpler sole-trader regime usually wins.
Is a limited company always more tax-efficient? No. At lower profits the two are roughly level after admin cost. Above £50,000 the limited company normally wins. IR35-caught contractors typically get no benefit from the limited company structure.
Does limited liability really protect my personal assets? Yes, but routinely with caveats. Most SME bank lending and many supplier credit lines require personal guarantees from directors, which survive insolvency. Wrongful trading and certain tax liabilities can also pierce the veil.
What’s the dividend tax rate in 2026/27? After a £500 dividend allowance, dividend tax is 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). These rates have been broadly stable since 2022/23.
How much does it cost to run a limited company per year? Typically £850 to £2,200 in year one for a basic Ltd including incorporation, confirmation statement, accounting software, and modest accountant fees. Sole-trader running cost is closer to £200 to £500 per year.
(Verify Corporation Tax rates, dividend allowance, and Class 4 NI rates before quoting specific figures, as Budget changes can affect them.)
Useful resources
GOV.UK — Set up a business https://www.gov.uk/set-up-business
GOV.UK — Corporation Tax rates https://www.gov.uk/corporation-tax-rates
HMRC — Tax on dividends https://www.gov.uk/tax-on-dividends