Sole Trader or Limited Company? The 2026/27 Numbers
The honest comparison: where the tax crossover actually sits in 2026/27, what a limited company really costs to run, and the reasons to incorporate that have nothing to do with tax.
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.
Originally published at ajhaccountant.co.uk/blog/sole-trader-vs-limited-company-2026.