Sole Trader or Limited Company? The 2026/27 Numbers
This is the question we are asked more than any other, and the honest answer is that the tax saving is real but smaller than most online calculators suggest, and it arrives later than people expect. Below is where the numbers actually sit for 2026/27, and the non-tax reasons that often matter more.
How each one is taxed
Sole trader
You are taxed on your profit, whether or not you take the money out. Income tax at 20% above the £12,570 personal allowance, 40% above £50,270, plus Class 4 National Insurance at 6% between £12,570 and £50,270 and 2% above. There is no separation between you and the business: the profit is your income the moment it is earned.
Limited company
The company is a separate legal person. It pays corporation tax on its profit — 19% up to £50,000, 25% above £250,000, with marginal relief in between. You then take money out, and are taxed personally on what you take:
- Salary — deductible for the company, taxable on you, and brings National Insurance into play for both sides above the thresholds.
- Dividends — paid from post-tax profit, so no NI. The first £500 is covered by the dividend allowance, then 8.75% for basic-rate taxpayers, 33.75% for higher rate.
The saving comes from the National Insurance a dividend avoids, not from the corporation tax rate. That is why it shrinks when you need to draw everything you earn.
Where the crossover really is
The usual structure is a small salary — enough to preserve your state pension record — with the rest drawn as dividends. Against that, put the extra running costs:
- Company accounts and corporation tax return
- Confirmation statement each year
- Payroll, if you take a salary
- Your own Self Assessment return on top
Realistically that is several hundred pounds a year more than sole trader accounts. So:
| Annual profit | Usually better as |
|---|---|
| Under £30,000 | Sole trader — the saving does not cover the extra cost |
| £30,000 – £50,000 | Marginal. Depends on how much you need to draw |
| Over £50,000 | Usually a company, especially if you can leave profit in it |
The single biggest factor is how much you need to live on. If you draw every penny, most of the advantage disappears. If you can leave profit in the company — building up for a deposit, equipment or a quiet quarter — it is taxed once at 19% and stays there until you need it.
The reasons that are not about tax
Limited liability
As a sole trader there is no line between business debts and your own money. A claim that exceeds your insurance reaches your house. A company confines it to the company, provided you have not given a personal guarantee — and banks and landlords very often ask for one, which quietly removes the protection people incorporated for.
Who you can work for
Some clients, agencies and public sector bodies will only contract with a limited company. If that is your market, the decision is made for you. Note the IR35 rules: working through your own company does not change the tax if you are effectively an employee of the end client.
What becomes public
Company accounts are filed at Companies House and anyone can read them, including your competitors and your customers. Your name and correspondence address appear on the public register. Sole trader accounts are seen by you and HMRC.
The mistakes we see most
- Treating the company bank account as a personal one. Money taken out that is not salary, dividend or a legitimate expense becomes a director's loan. If it is still outstanding nine months after the year end, the company pays a 33.75% charge on it.
- Declaring dividends with no profit to pay them from. A dividend can only be paid out of distributable reserves. Paid without them, it is unlawful and gets reclassified.
- Incorporating on day one. A business that has not proven itself gains filing duties and penalties before it gains any tax saving.
A worked comparison
Profit of £60,000, with £40,000 needed personally:
- Sole trader: taxed on the whole £60,000 regardless of what is drawn — income tax and Class 4 NI on everything above £12,570.
- Company: corporation tax at 19% on the profit, then personal tax only on the salary and dividends actually taken. The remaining £20,000 stays in the company, taxed once, and can be drawn in a later year — potentially in a year when you are a basic-rate taxpayer.
That deferral, not the headline rate, is where most of the real benefit sits.
Getting help with this
AJH Accountants handles limited company and sole trader accounting for clients across the UK. We file the return, tell you what you can claim, and deal with HMRC on your behalf, so nothing depends on you remembering a deadline.
See how our limited company and sole trader accounting service works, or send us a quotation request and we will call you back. You can also call the office on 01204 840303.
Quick answers
- Below roughly £30,000 of profit, a limited company rarely pays for itself.
- A sole trader pays income tax and Class 4 NI on all profit, whether or not it is drawn.
- A company pays 19% corporation tax on profits up to £50,000, then marginal relief to 25%.
- The dividend allowance is £500, so most dividends are taxed from the first pound.
- Limited liability, not tax, is the strongest reason to incorporate for many trades.
- A company brings filing duties at Companies House and a public record of your accounts.
FAQs
At what profit does a limited company become worth it?
As a rough guide, the tax saving starts to outweigh the extra cost somewhere around £30,000 to £40,000 of annual profit, and becomes clear above £50,000. Below that, the accountancy fees, confirmation statement and extra admin usually cancel out the saving. The figure is only a guide: it moves with how much you need to draw personally, whether you have other income, and whether your spouse can hold shares.
What is the main disadvantage of a limited company?
Everything becomes more formal. Your accounts are filed at Companies House and anyone can read them. Money in the company is not yours to spend — taking it out has to be done properly as salary, dividends or expenses, and an overdrawn director's loan account brings a 33.75% tax charge. You also have real filing deadlines with automatic penalties attached, on top of your own Self Assessment.
How much corporation tax will my company pay?
Profits up to £50,000 are taxed at the 19% small profits rate. Profits over £250,000 are taxed at 25%. Between the two, you pay 25% with marginal relief, which produces an effective rate somewhere between the two figures. Those thresholds are divided between associated companies, so a second company halves them.
Can I change from sole trader to limited company later?
Yes, and most people should wait until the numbers justify it rather than incorporating on day one. You form the company, move the trade across, and deal with the transfer of any assets and goodwill. There can be a capital gains charge on the transfer, so it is worth taking advice on timing rather than doing it in the last week of a tax year.
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Where this information comes from
This article was written using the following published sources, and was last reviewed on 3 September 2026:
Please read this before acting on anything above
We have taken care to get this right and believe it to be correct to the best of our knowledge at the time of writing. Even so, we cannot guarantee that everything here is completely accurate or still current, and we do not accept responsibility for any loss arising from relying on it. Tax rules change, sometimes at short notice, and pages are not always updated the same day.
This is general information, not advice about your own circumstances. Two people with the same income can owe very different amounts. Please do not make a decision on the strength of this article alone. Check the sources above, do your own research, and reach your own decision — and where money or a filing deadline turns on it, speak to a qualified accountant who knows your full position first.