Sole Trader vs Limited Company in 2026: Which Pays Less Tax?

"Should I go limited?" is the question every growing sole trader asks — usually after someone at the pub says a company saves thousands in tax. In 2026 that advice is often out of date. Dividend tax rose on 6 April 2026, employer National Insurance is now 15%, and a one-person company can't claim the Employment Allowance. This guide compares the two structures with real 2026 to 2027 numbers at six profit levels, then covers what tax tables leave out: liability, admin, privacy, employment status and the practical moment to switch.

Quick answer

A sole trader is simpler and cheaper to run and, in 2026 to 2027, usually keeps slightly more of each pound if you take all the profit out. A limited company gives you limited liability and can pay less tax overall when you leave profits in the business, share ownership or make big pension contributions — but it adds accounts, a Corporation Tax return, payroll and public filings.

• At £50,000 profit, our worked example takes home £40,268 as a sole trader and £38,862 through a company

• Dividends above the £500 allowance are taxed at 10.75% / 35.75% / 39.35% from April 2026

• Company profits pay 19%–25% Corporation Tax before any dividend

• Sole traders pay Income Tax plus Class 4 NI at 6% and 2%

• Choose a company mainly for liability protection, retained profits or credibility — not a guaranteed tax saving

The basic difference

As a sole trader, you are the business. There's no separate legal entity: the profits are yours, the contracts are in your name and the debts are yours too. You register with HMRC for Self Assessment, keep records and file one tax return a year. Our sole trader registration guide covers the steps.

A private limited company is a separate legal person, registered with Companies House. It owns the business, earns the profit and pays Corporation Tax on it. You are usually both a director (who runs it) and a shareholder (who owns it). Money only reaches you as salary, dividends, pension contributions or repaid loans, and each route has its own tax. The limited company set-up guide walks through incorporation, including the identity verification every director now needs.

That single distinction — whether the business is you or a separate entity — drives every difference that follows: tax, liability, paperwork, privacy and how you get paid.

Sole trader vs limited company at a glance (2026)

	Sole trader	Limited company
Legal status	You are the business	Separate legal person
Set-up cost	Free (HMRC registration)	£100 at Companies House
Liability	Unlimited — personal assets at risk	Usually limited to share capital
Tax on profits	Income Tax 20%/40%/45% + Class 4 NI	Corporation Tax 19%–25%, then tax on salary and dividends
Annual filings	Self Assessment return	Accounts, CT600, confirmation statement (£50), payroll, personal return
Privacy	Nothing published	Directors, shareholders and accounts on a public register
Taking money out	Any time — it's already yours	Salary, dividends (only from profits) or director's loan
Making Tax Digital for Income Tax	Applies above £50,000 income from April 2026	Not for company profits (VAT MTD still applies if registered)

Legal status

Sole trader

You are the business

Limited company

Separate legal person

Set-up cost

Sole trader

Free (HMRC registration)

Limited company

£100 at Companies House

Liability

Sole trader

Unlimited — personal assets at risk

Limited company

Usually limited to share capital

Tax on profits

Sole trader

Income Tax 20%/40%/45% + Class 4 NI

Limited company

Corporation Tax 19%–25%, then tax on salary and dividends

Annual filings

Sole trader

Self Assessment return

Limited company

Accounts, CT600, confirmation statement (£50), payroll, personal return

Privacy

Sole trader

Nothing published

Limited company

Directors, shareholders and accounts on a public register

Taking money out

Sole trader

Any time — it's already yours

Limited company

Salary, dividends (only from profits) or director's loan

Making Tax Digital for Income Tax

Sole trader

Applies above £50,000 income from April 2026

Limited company

Not for company profits (VAT MTD still applies if registered)

How each is taxed in 2026 to 2027

Sole trader

Your taxable profit is income minus allowable expenses. On that profit you pay:

• Income Tax — nothing on the first £12,570 (the personal allowance), 20% up to £50,270, 40% above that and 45% above £125,140. The personal allowance shrinks by £1 for every £2 of income over £100,000.
• Class 4 National Insurance — 6% on profits between £12,570 and £50,270, and 2% above that. Compulsory Class 2 ended in April 2024; if your profits are below £7,105 you can pay voluntary Class 2 at £3.65 a week to protect your State Pension record.

All of this is paid through Self Assessment, normally by 31 January after the tax year, with payments on account towards the next year. Our self-employed tax guide works through a full calculation.

Limited company

The company pays Corporation Tax on its profits after deducting salaries, employer NI and other costs: 19% on profits up to £50,000, 25% above £250,000, and a tapered rate in between through marginal relief (an effective 26.5% on the slice between the two limits). See Corporation Tax for the full rules.

Then you pay personal tax on what you take out:

• Salary is taxed like any job through PAYE. Employees pay 8% NI above £12,570, and the company pays 15% employer NI above £5,000. Salary and employer NI reduce the company's taxable profit.
• Dividends come out of profit after Corporation Tax. The first £500 is tax-free; the rest is taxed at 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 went up by two percentage points on 6 April 2026 (from 8.75% and 33.75%). Our dividend tax guide explains how dividends stack on top of other income.

The Employment Allowance trap for one-person companies

Larger employers can knock up to £10,500 a year off their employer NI bill with the Employment Allowance. But HMRC's rules say a company with a single director can't claim it if that director is the only employee paying secondary Class 1 NI. So a typical one-person company pays employer NI on any salary above £5,000 — and that's built into our figures below.

Worked comparison at six profit levels

Here's what you keep from the same business profit, before any pension contributions, in England, Wales or Northern Ireland for 2026 to 2027.

Assumptions for the company column: one director-shareholder with no other income; a salary of £12,570, which costs the company £1,135.50 in employer NI because no Employment Allowance is available; all profit left after Corporation Tax paid out as dividends in the same year. Accountancy and other running costs are left out of both columns, and so is the student loan.

"Company total tax" includes employer NI, Corporation Tax and dividend tax. On these assumptions, a sole director who draws every pound doesn't save tax by incorporating at any level — and the gap widens at higher profits, where Corporation Tax at up to 26.5% on the marginal slice plus dividend tax at 35.75% outweighs Income Tax at 40% plus 2% Class 4. Before April 2026, with lower dividend rates, the company route was roughly break-even or slightly ahead in the middle of this range. The rate rise removed most of that advantage.

The £50,000 example step by step

£50,000 profit — how each figure is reached

1. 1

   Sole trader Income Tax

   £50,000 − £12,570 = £37,430 taxable × 20% = £7,486.

2. 2

   Sole trader Class 4 NI

   £37,430 × 6% = £2,245.80. Take-home: £50,000 − £9,731.80 = £40,268.

3. 3

   Company salary and employer NI

   Salary £12,570; employer NI (£12,570 − £5,000) × 15% = £1,135.50. No Income Tax or employee NI on the salary.

4. 4

   Corporation Tax

   £50,000 − £12,570 − £1,135.50 = £36,294.50 profit × 19% = £6,895.96. Leaves £29,398.54 for dividends.

5. 5

   Dividend tax

   First £500 tax-free; £28,898.54 × 10.75% = £3,106.59. Take-home: £12,570 + £29,398.54 − £3,106.59 = £38,862.

Why a salary of £12,570 rather than £5,000?

Many older guides recommend a director's salary at the secondary threshold to avoid employer NI. For a one-person company in 2026, a salary up to the personal allowance usually still wins. The extra £7,570 of salary costs £8,705.50 including employer NI, but it saves £1,654 in Corporation Tax and reaches you tax-free. Paid as a dividend instead, the same money would leave you about £6,290 after Corporation Tax and dividend tax, against £7,570 as salary. At a salary of £12,570 you also earn a qualifying year for the State Pension without paying employee NI. Companies that can claim the Employment Allowance (for example, with two or more employees on payroll) have even more reason to pay a salary at this level.

When a limited company does come out ahead

The table above is the worst case for a company: one owner, no other employees, every penny paid out. Change any of those and the picture can flip.

Leaving profits in the company

A company only pays personal tax on what you take out. Say profit is £80,000 and you need £46,000 a year to live on. You take the £12,570 salary plus £37,700 of dividends, which keeps your total income at £50,270 — the top of the basic-rate band — so all the dividend tax is at 10.75%. Your personal take-home is about £46,271 and the company keeps around £14,776 after Corporation Tax.

£80,000 profit — company keeps £14,776 back

£46,271

Director's take-home

£12,570 salary + £37,700 dividends

£14,776

Retained in the company

After Corporation Tax

£18,953

Total tax this year

vs £22,289 as a sole trader

Total tax paid that year is about £18,953, against £22,289 for a sole trader with the same profit — roughly £3,300 less. This is a deferral rather than a permanent saving: the retained cash is taxed again when you eventually take it out. But it pays off if you'll reinvest it in equipment or staff, draw it in a later year when your income is lower, or extract it on retirement or a sale where other reliefs may apply.

Pension contributions

Employer pension contributions made by the company are normally deductible for Corporation Tax and carry no NI, provided they're "wholly and exclusively" for the business. A director who wants to put a large sum into a pension can often do it more efficiently through a company than as a sole trader making personal contributions. Annual allowance limits still apply.

Sharing ownership

When a spouse or partner genuinely works in and co-owns the business, each shareholder has their own personal allowance, dividend allowance and basic-rate band. Splitting income between two people can produce real savings. HMRC scrutinises arrangements where shares are given to a spouse who does no work, so get advice on the "settlements" rules.

Living in Scotland

Scottish taxpayers pay Scottish Income Tax rates on earnings and self-employed profits — including 42% at the higher rate and 45% at the advanced rate — but dividends are taxed at UK dividend rates. That narrows the sole trader's advantage once profits enter Scottish higher-rate bands, so run the numbers with Scottish rates if you live in Scotland.

Liability, credibility and privacy

Tax is only part of the decision. The biggest non-tax difference is liability. A sole trader is personally responsible for every business debt: an unpaid supplier, a lease, a court award. A company's shareholders normally risk only what they paid for their shares.

In practice limited liability is thinner than it sounds. Banks and landlords often ask small-company directors for personal guarantees, which put your own assets back on the line for that debt. Directors who keep trading when the company can't pay its debts, or who breach their duties, can be made personally liable. And limited liability doesn't replace insurance — a professional negligence or injury claim still needs proper cover.

Some clients — larger corporates, public bodies and recruitment agencies — prefer or insist on working with limited companies. A company can also make it easier to bring in investors or co-founders, because you can issue shares.

The trade-off is privacy. Companies House publishes the company's registered office, directors' names, service addresses, month and year of birth, shareholders and people with significant control, and its annual accounts. A sole trader publishes nothing.

Self-employed or employee? Check your status first

Before choosing between sole trader and company, make sure you're genuinely self-employed. Employment status is decided by how you actually work, not by what a contract calls you.

GOV.UK says you're probably self-employed if most of these apply: you bid or quote for work, you aren't directly supervised, you invoice for work done, you're responsible for your own tax and NI, and you don't get holiday or sick pay. Other signs are that you can send a substitute, set your own hours and prices, use your own equipment and take the risk of making a loss.

You're more likely an employee if the business controls when, where and how you work, you must do the work personally, you're paid a regular wage and you're part of their organisation. There's also a middle category, worker, with rights such as the minimum wage and holiday pay. Self-employed people have few employment rights beyond health and safety and, in some cases, protection from discrimination.

Employee, worker or self-employed?

	Employee	Worker	Self-employed
Who controls the work	The employer	Mostly the business	You
Can send a substitute	No	Usually no	Usually yes
Tax and NI	PAYE by employer	Usually PAYE	Self Assessment (or your own company)
Holiday pay and minimum wage	Yes	Yes	No
Unfair dismissal and redundancy rights	Yes (after qualifying period)	No	No

Who controls the work

Employee

The employer

Worker

Mostly the business

Self-employed

You

Can send a substitute

Employee

No

Worker

Usually no

Self-employed

Usually yes

Tax and NI

Employee

PAYE by employer

Worker

Usually PAYE

Self-employed

Self Assessment (or your own company)

Holiday pay and minimum wage

Employee

Yes

Worker

Yes

Self-employed

No

Unfair dismissal and redundancy rights

Employee

Yes (after qualifying period)

Worker

No

Self-employed

No

For tax, HMRC's Check Employment Status for Tax (CEST) tool gives a view based on your answers. If you're really an employee, setting up a company doesn't change that. When a contractor works through their own company for a medium or large client, the off-payroll working rules (IR35) make the client decide the status and, if it's employment, deduct tax and NI as if you were on payroll. Small private-sector clients are outside this; from April 2025 the size test uses turnover of up to £15 million and a balance sheet of up to £7.5 million (two of three conditions, including 50 staff), with effect for off-payroll purposes from April 2027 at the earliest. With a small client, your own company makes the status call.

Admin and running costs

A sole trader's yearly admin is one Self Assessment return plus records. From April 2026, sole traders with qualifying income over £50,000 must also send quarterly updates under Making Tax Digital; the threshold falls to £30,000 in 2027 and £20,000 in 2028.

A company's admin is heavier:

• Annual accounts filed at Companies House within 9 months of the year end, with automatic penalties from £150 if late.
• A Company Tax Return (CT600) within 12 months after the end of the accounting period, with Corporation Tax payable 9 months and 1 day after the end of the accounting period.
• A confirmation statement every year at £50.
• PAYE payroll for the director's salary, reported to HMRC each time you pay, and employer registration.
• Dividend paperwork — board minutes and vouchers — and a register of members and people with significant control.
• Usually still a personal Self Assessment return for your dividends.

Most company owners pay an accountant, and fees for a limited company are typically higher than for a sole trader because of the extra filings. Add those fees to the company column before deciding: even a modest difference wipes out any small tax saving. Ask two or three accountants for fixed quotes for each structure.

Remember too that a company's money isn't yours. Taking cash out other than as salary, dividends or a properly recorded loan creates an overdrawn director's loan account, which can trigger an extra Corporation Tax charge and a benefit-in-kind charge if not repaid in time.

Switching from sole trader to limited company

Moving from sole trader to a limited company

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• Get personalised figures from an accountant for your profit and plans
• Verify your identity with Companies House and register the company (£100)
• Open a company bank account and move contracts, suppliers and insurance into the company's name
• Agree how equipment, stock and goodwill transfer — this can trigger Capital Gains Tax or capital allowances balancing adjustments
• Deregister for VAT as a sole trader and register the company, or transfer the registration as a going concern
• Register the company as an employer before paying any salary
• Tell HMRC you've stopped self-employment and file a final Self Assessment return

Share Print

Timing matters. Switching at the start of a tax year or accounting period keeps the records clean. If the business owns property, transferring it can trigger Stamp Duty Land Tax, and incorporation relief for Capital Gains Tax only applies when the whole business, with all its assets (other than cash), is transferred in exchange for shares. These are the points to settle with an accountant before you move anything.

Common mistakes

• Incorporating on old figures. Calculators and blog posts written before April 2026 use the old dividend rates and often ignore employer NI on the director's salary.
• Forgetting accountancy fees. A few hundred pounds of extra costs can erase a small tax saving entirely.
• Treating company money as your own. Drawing cash without a dividend or salary creates a director's loan problem.
• Using a company to avoid IR35. If you'd be an employee of your client, a company doesn't change that — the off-payroll rules exist for exactly this case.
• Ignoring personal guarantees. Limited liability means little if you've personally guaranteed the overdraft and the lease.
• Staying a sole trader in a risky trade. If a single claim could cost you your home, liability protection and insurance may matter more than a small tax difference.

Official GOV.UK links

• Set up a businessCompare structures
• Tax on dividends2026 to 2027 rates
• Self-employed National Insurance ratesClass 2 and Class 4
• Rates and thresholds for employers 2026 to 2027PAYE and Class 1 NI
• Corporation Tax ratesSmall profits rate and marginal relief
• Check employment status for taxHMRC's CEST tool
• Employment Allowance eligibilitySingle-director rule

What to do next

If you're starting out, register as a sole trader and revisit the question once profits are steady — our guide to how to start a business in the UK covers the full sequence. If you're already profitable and expect to leave money in the business, ask an accountant to rerun the table above with your own numbers before incorporating. Price your work properly with the hourly rate calculator and plan your drawings with the budget planner.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

Is a limited company more tax-efficient than being a sole trader in 2026?

Less often than it used to be. With dividend tax at 10.75% and 35.75% from April 2026 and employer NI at 15%, a sole director who takes all the profit out usually keeps slightly less through a company at every profit level in our worked table. A company mainly saves tax when you leave profits in the business, split income with a co-owner or make large pension contributions.

At what profit should I switch from sole trader to limited company?

There is no longer a simple tipping point. If you spend everything you earn, our 2026 to 2027 figures show a company costing more tax at £20,000 to £150,000 profit. If you can leave a meaningful amount in the company each year, or the business carries real liability risk, incorporating can still make sense, usually once profits are comfortably above £50,000. Get personalised advice first.

What is the difference between being self-employed and an employee?

An employee works under an employer's control, gets holiday and sick pay and has tax and National Insurance taken through PAYE. A self-employed person runs their own business, can usually send someone else to do the work, sets their own prices, invoices clients and pays tax through Self Assessment. HMRC's Check Employment Status for Tax tool helps you decide for tax purposes.

Can I be employed and self-employed at the same time?

Yes. Many people have a job taxed through PAYE and a side business taxed through Self Assessment. Your salary uses your personal allowance first, so business profit is usually taxed from the first pound. You register for Self Assessment once gross trading income passes £1,000 in a tax year.

Is a sole trader personally liable for business debts?

Yes. A sole trader and the business are the same legal person, so creditors can pursue your personal savings, car or home to recover business debts. A limited company's shareholders are usually liable only for what they paid for their shares, although directors who give personal guarantees, trade wrongfully or ignore their duties can still be personally liable.

Can a sole trader change to a limited company later?

Yes, and many do. You register a new company with Companies House for £100, transfer the business and its assets to it, tell HMRC you've stopped self-employment and file a final Self Assessment return. Transferring assets can have Capital Gains Tax, VAT and Stamp Duty Land Tax effects, so take advice before you move anything of value.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 7 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Set up a business — GOV.UK · accessed 7 October 2026
2. 2.Tax on dividends — GOV.UK · accessed 7 October 2026
3. 3.Income Tax rates and Personal Allowances — GOV.UK · accessed 7 October 2026
4. 4.Self-employed National Insurance rates — GOV.UK · accessed 7 October 2026
5. 5.Rates and thresholds for employers 2026 to 2027 — HMRC / GOV.UK · accessed 7 October 2026
6. 6.Employment Allowance: eligibility — HMRC / GOV.UK · accessed 7 October 2026
7. 7.Corporation Tax rates and allowances — HMRC / GOV.UK · accessed 7 October 2026
8. 8.Employment status: self-employed and contractor — GOV.UK · accessed 7 October 2026
9. 9.ESM10006A — Off-payroll working: size-threshold changes from 6 April 2025 — HMRC · accessed 7 October 2026
10. 10.Scottish Income Tax — GOV.UK · accessed 7 October 2026