Should you trade as a sole trader or through a limited company? It is the first structural decision most UK small business owners face, and the one most often answered with a slogan — “limited companies pay less tax” — that is only half true. In 2026/27 the answer depends on one thing above all: how much of the profit you actually need to take out. Take everything out and the limited company usually costs you more tax. Leave profit in the company and it usually costs you less.
The two structures in 30 seconds
| Sole trader (self-employed) | Limited company | |
|---|---|---|
| Legal status | You and the business are the same person | The company is a separate legal person |
| Taxed on | All profit, whether you withdraw it or not | Company pays Corporation Tax; you pay personal tax only on what you take out |
| National Insurance | Class 4 on profits (plus Class 2 treated as paid above £6,725) | Employer NI on salary; no NI on dividends |
| Liability | Unlimited — your personal assets are at risk | Limited — usually only what you invested |
| Admin | Self Assessment once a year | Confirmation statement, statutory accounts, company tax return, payroll |
| Typical accountancy cost | £300–£800 a year | £1,000–£3,000+ a year |
How a sole trader is taxed in 2026/27
As a sole trader, your entire taxable profit is treated as your personal income and taxed through Self Assessment — it does not matter how much cash you draw from the business account. Earn £70,000 of profit and withdraw only £35,000, and you are still taxed on £70,000. Withdrawals are drawings, not salary, and are not taxed separately.
Income Tax for 2026/27 in England, Wales and Northern Ireland runs at 20% on income between £12,571 and £50,270, 40% between £50,271 and £125,140, and 45% above that, after the £12,570 personal allowance. Above £100,000 you also lose £1 of personal allowance for every £2 over £100,000, creating an effective 60% marginal rate in that band.
On top of Income Tax you pay Class 4 National Insurance: 6% on profits between £12,570 and £50,270, then 2% above £50,270. A sole trader in the basic-rate band therefore pays a combined marginal rate of 26% (20% tax plus 6% NI), and 42% in the higher-rate band. Class 2 National Insurance is treated as paid once profits reach the £6,725 Small Profits Threshold, which protects your state pension record without a separate bill.
How a limited company is taxed in 2026/27
A limited company pays Corporation Tax on its profits: 19% on profits up to £50,000, 25% above £250,000, with marginal relief tapering the rate in between. Our guide to corporation tax marginal relief walks through the calculation — the relief is (£250,000 − profits) × 3/200, so a company on £86,295 of profit pays an effective rate of about 22%.
What you take out is taxed separately. Most owner-directors use a small salary plus dividends. A salary of £12,570 uses the personal allowance exactly, so no Income Tax or employee National Insurance is due on it, and the salary is deductible against Corporation Tax. But there is a trap most guides skip: employer National Insurance is 15% on salary above the £5,000 secondary threshold, which costs £1,135.50 on a £12,570 salary — and a company whose only employee paid above the threshold is a director cannot claim the £10,500 Employment Allowance. Our dividends vs salary guide compares the extraction options in detail.
Dividends are paid from profits left after Corporation Tax, and they carry no National Insurance at all — the reason the salary-plus-dividends structure exists. But the dividend rates rose on 6 April 2026, and this is where older advice goes wrong: for 2026/27 the rates above the £500 dividend allowance are 10.75% in the basic-rate band, 35.75% in the higher-rate band and 39.35% in the additional-rate band. The basic and higher rates are each 2 percentage points higher than in 2025/26 (8.75% and 33.75%).
Side-by-side: the tax bill at £30,000, £50,000 and £100,000 profit
The table below compares the same profit through both structures, assuming the director takes a £12,570 salary and the rest as dividends, and takes all the profit out. Figures are for 2026/27 in England, with no other income, pension contributions or student loan.
| Profit | Sole trader total tax | Take-home | Limited company total tax | Take-home | Company costs extra |
|---|---|---|---|---|---|
| £30,000 | £4,532 | £25,468 | £5,597 | £24,403 | £1,065 |
| £50,000 | £9,732 | £40,268 | £11,138 | £38,862 | £1,406 |
| £100,000 | £30,689 | £69,311 | £34,790 | £65,210 | £4,102 |
The pattern is clear, and it surprises most people: if you take all the profit out, the limited company costs more tax at every level — £1,065 more at £30,000, £1,406 more at £50,000 and £4,102 more at £100,000. The double layer of Corporation Tax plus dividend tax outweighs the National Insurance saving, and the gap widens as more dividends fall into the 35.75% higher-rate band.
Now look at the same profits if you only take the £12,570 salary and leave the rest in the company:
| Profit | Sole trader total tax | Limited company tax (salary + Corporation Tax only) | Tax saved by retaining |
|---|---|---|---|
| £30,000 | £4,532 | £4,231 | £300 |
| £50,000 | £9,732 | £8,031 | £1,700 |
| £100,000 | £30,689 | £20,254 | £10,435 |
This is the real limited-company advantage, and it is about timing rather than magic. The sole trader is taxed on all £100,000 of profit in the year it is earned, at up to 40% plus National Insurance. The company pays Corporation Tax at an effective rate of about 22% and the rest sits in the company, taxed personally only when you eventually draw it as dividends. At £100,000 of profit the deferral is worth £10,435 in the year. Remember it is deferred tax, not avoided tax: dividends drawn in a later year are taxed then.
When the limited company wins — and when it doesn’t
The break-even point most accountants quote is £30,000–£50,000 of annual profit, and the tables above show why that range is only half the story. Profit level matters, but what matters more is how much you need to live on. If your profit is £50,000 and you need £45,000 of it to live on, the sole trader route is cheaper. If you need only £25,000, the company route starts to win because the retained £25,000 is taxed at 19% instead of 26–42%.
Three other situations tip the balance towards a company. Employer pension contributions are deductible for Corporation Tax and attract no National Insurance, so a company can put far more into your pension tax-efficiently. Limited liability matters if you sign leases, take on debt or work where a single claim could exceed your assets. Stay a sole trader if your profit is modest, you need nearly all of it to live on, or you value simple admin.
The costs nobody puts in the tax calculator
Tax is not the whole cost of a structure. A limited company files a confirmation statement every year (£50 filing fee), statutory accounts at Companies House, a CT600 company tax return with HMRC, and runs payroll even for a single director’s salary. Incorporating costs £100 online (since 1 February 2026), but the ongoing compliance adds roughly £700–£2,200 a year in accountancy fees. At £30,000 of profit that extra admin alone wipes out the small retained-profit saving.
The differences that are not about tax
Some taxes do not change with structure at all. VAT registration, for example, depends on taxable turnover, not on whether you are a sole trader or a company — the VAT registration threshold guide explains the threshold and when voluntary registration pays.
Making Tax Digital is a genuine difference, and it moved in 2026. From 6 April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and send quarterly updates to HMRC; the threshold falls to £30,000 from April 2027 and £20,000 from April 2028. Limited company directors are not in MTD for Income Tax on their salary and dividend income, though the company still files its own Corporation Tax return. Our Making Tax Digital guide sets out the timetable and what to do first.
How to decide: a five-step check
1. Work out your real profit after all allowable expenses, not your turnover. 2. Decide how much of it you genuinely need to live on each year. 3. Run the two tables above on your numbers. 4. Add the extra accountancy and compliance cost of a company, roughly £700–£2,200 a year. 5. Weigh the non-tax factors: liability, pensions, MTD admin and client expectations.
Frequently asked questions
At what profit should I become a limited company?
There is no single threshold, but the tax saving from retaining profit usually outweighs the extra admin once profit passes roughly £40,000–£50,000 a year and you can leave a meaningful amount in the company. Below £30,000, the sole trader route is almost always cheaper.
Do I pay less tax as a limited company?
Only if you leave profit in the company or pay it into a pension. If you take all the profit out, a limited company costs more tax in 2026/27 — £1,406 more at £50,000 of profit.
Related reading
Corporation tax marginal relief for UK small companies
Dividends vs salary for limited company directors
Making Tax Digital for Income Tax: self-employed guide 2026