YF AccountingLast updated: 23 July 2026
7 min read
For most people starting out in 2026/27, sole trader is the better choice: it is simpler, cheaper to run, and — since dividend tax rates rose in April 2026 — often no more expensive in tax, even at healthy profit levels. A limited company earns its keep when you want to leave profits in the business, protect your personal assets, split income with a spouse, or eventually sell. This guide compares the two honestly, with worked figures, so you can see where the line actually falls.
First, a quick clarification. If you are here because you are not sure whether “sole trader” and “self-employed” mean different things: they do not. I explain why in my guide to sole trader vs self-employed. This page is about the decision that genuinely changes your tax bill — sole trader or limited company.
What is the difference between a sole trader and a limited company?
As a sole trader, you and the business are the same legal person. You keep all the profits after tax, you file one Self Assessment return, and you are personally liable for every business debt — that is what “unlimited liability” means. Setup is a single HMRC registration.
A limited company is a separate legal person. It owns the business, signs the contracts and owes the debts; your liability is generally limited to what you put in. You are its director and shareholder, you pay yourself through salary and dividends, and the company files accounts and a corporation tax return every year. More protection, more paperwork.
How is each structure taxed in 2026/27?
| Sole trader | Limited company | |
|---|---|---|
| Tax on profits | Income tax at 20% / 40% / 45% above the £12,570 personal allowance | Corporation tax at 19% up to £50k, marginal relief to £250k, then 25% |
| National Insurance | Class 4 at 6% (£12,570–£50,270) and 2% above | Employer NI at 15% on salary above £5,000; employee NI 8% / 2% |
| Taking money out | Just take it — you are taxed on profits either way | Dividend tax on top: 10.75% basic, 35.75% higher, 39.35% additional (£500 allowance) |
| Losses and pensions | Personal pension contributions extend your bands | Employer pension contributions are usually deductible for corporation tax |
The key structural difference: a sole trader is taxed on all profits in the year they arise, whether or not the money is spent. A company pays corporation tax on its profits, and you only pay personal tax on what you actually take out.
Which pays less tax? The 2026/27 numbers
Here is the comparison people actually want. The figures below assume a single director taking a £12,570 salary plus all remaining profit as dividends, no Employment Allowance (a sole-director company paying only its director above the £5,000 threshold does not qualify), and 2026/27 rates throughout. Sole trader figures include income tax and Class 4 NI.
| Profit | Sole trader: total tax | Company: total tax (all profit extracted) | Verdict |
|---|---|---|---|
| £30,000 | ≈ £4,530 | ≈ £5,600 | Sole trader ≈ £1,070 better |
| £50,000 | ≈ £9,730 | ≈ £11,140 | Sole trader ≈ £1,410 better |
| £80,000 | ≈ £22,290 | ≈ £24,240 | Sole trader ≈ £1,950 better |
Yes, you read that right. Dividend tax rates rose by two percentage points on 6 April 2026 (basic rate 8.75% to 10.75%, higher rate 33.75% to 35.75%), and with employer NI at 15% on salaries, the old “incorporate at £30k and save thousands” rule of thumb is dead. If you plan to extract every pound you earn, a limited company now usually costs slightly more tax, not less. Anyone telling you otherwise is working from an out-of-date spreadsheet.
The company also comes with extra running costs — accountancy fees are higher, and the Companies House confirmation statement alone is now £50 a year. So why does anyone incorporate? Because the comparison above assumes full extraction, and that assumption is where the limited company quietly wins it back.
When does a limited company still win?
- You leave profit in the business. Retained profits are taxed at 19–25% corporation tax and nothing more until you take them out. A sole trader earning £80,000 pays up to 42% on the top slice whether they need the money or not. If you only need £45,000 to live on, the company defers — and often permanently reduces — the rest.
- Pension contributions. Employer contributions from the company are corporation-tax deductible and free of NI — one of the cleanest planning tools left, within the £60,000 annual allowance.
- Income splitting. Shares can be held by a spouse or partner, using two sets of allowances and basic-rate bands. Sole traders cannot split profits without a genuine partnership.
- The £100,000 trap. Between £100,000 and £125,140 the personal allowance tapers away, creating a 60% effective rate. A company lets you cap your personal income below the cliff edge; a sole trader takes the hit in a good year.
- Limited liability. If the business could realistically face a claim or bad debt bigger than your insurance, the company shell matters more than any tax arithmetic.
- Selling or winding up. Company shares sold or liquidated can qualify for Business Asset Disposal Relief at 18% on the first £1 million of lifetime gains.
- Credibility and contracts. Some agencies and corporates simply will not engage sole traders, particularly in contracting — though check your IR35 position before assuming a company solves anything there.
What about admin and running costs?
Sole traders file a Self Assessment return — though note that Making Tax Digital for Income Tax is now live: if your qualifying income is over £50,000 you keep digital records and send quarterly updates, with the £30,000 tier joining in April 2027. My guide to MTD for Income Tax covers what that means day to day. So “sole trader admin” is no longer quite the doddle it was.
A company still carries more: annual accounts to Companies House, a CT600 corporation tax return, a confirmation statement, payroll if you take a salary, dividend paperwork, and — since November 2025 — mandatory identity verification for directors. Incorporation itself now costs £100 online. None of it is difficult with decent software and an accountant, but it is not nothing, and it is the main reason company accountancy fees run higher.
When should I switch from sole trader to limited company?
There is no magic profit number any more — the honest triggers are behavioural. Switch when you are regularly earning more than you spend and could leave profit in the company; when your risk exposure has outgrown what insurance comfortably covers; when a spouse could genuinely share the income; when clients require it; or when a sale is on the horizon. If you are extracting everything to live on, staying a sole trader is now often the cheaper and simpler option — and I say that as someone who earns fees from company accounts.
If the company route is right for you, my step-by-step guide on how to form a limited company in 2026 covers the whole process, including the new identity verification rules. And whichever side you land on, make sure you are claiming everything you can: see my guides to allowable expenses for the self-employed and allowable expenses for limited companies.
Frequently asked questions
Is it better to be a sole trader or a limited company in 2026/27?
On pure tax, if you extract all your profits, sole trader is now usually slightly cheaper at most profit levels, because dividend tax rates rose in April 2026. A limited company wins when you retain profits, make employer pension contributions, split income with a spouse, need limited liability, or plan to sell the business.
At what profit level should I incorporate?
There is no longer a reliable threshold. The old advice of incorporating around £30,000–£40,000 predates the 2026 dividend rate rises. Today the better question is how much profit you can afford to leave in the company: if the answer is “a meaningful amount, most years”, incorporation starts to pay. If it is “none”, it probably does not.
How do I pay myself from a limited company?
Typically a small salary — often £12,570 to use the personal allowance — topped up with dividends from post-tax profits. Dividends are taxed at 10.75%, 35.75% or 39.35% in 2026/27 after the £500 allowance. The best mix depends on your other income; my salary vs dividends guide works through the options.
Can I switch from sole trader to limited company later?
Yes, and people do it every day. You incorporate the company, transfer the trade and assets across, register for the relevant taxes and tell your customers and suppliers. It is straightforward with help, but it is a change of legal entity — new bank account, new contracts, final sole trader tax return — so it is rarely free of friction. Plan it, do not drift into it.
Do limited companies pay less tax than sole traders?
Not automatically, and in 2026/27 often not at all. Corporation tax at 19–25% looks lower than income tax, but extracting the money as dividends adds a second layer of personal tax that usually closes the gap. The company’s real advantages are deferral on retained profits, pension flexibility and income splitting — not the headline rate.
What are the downsides of a limited company?
More admin and cost: annual accounts, a corporation tax return, payroll, a £50 confirmation statement, director identity verification and higher accountancy fees. Your accounts and details are also public at Companies House. And taking money out is a formal process — you cannot simply treat the company bank account as your own without tax consequences.
Want a straight answer for your numbers?
This decision takes about twenty minutes with your real figures in front of us, and I will tell you honestly if staying a sole trader is the right call. I am a Manchester-based, fixed-fee accountant — sole traders from £35 a month, limited companies from £50 a month, one point of contact, and my pricing is on the website rather than behind a quote form.
Book a free, no-obligation call or ring 0161 531 0959.
This article is general information, not personal tax advice. Figures are rounded and assume the stated scenarios. For advice on your own situation, please get in touch.
Founder of YF Accounting — a fixed-fee, fully digital accountancy practice in Manchester serving SMEs, sole traders and landlords across the UK. One point of contact, unlimited support, no surprise bills.
Related reading
How to Form a Limited Company in the UK: A Step-by-Step Guide for 2026
Xero vs QuickBooks vs FreeAgent: Which Is Right for Your Business in 2026?
Allowable Expenses for Limited Companies: What You Can Claim in 2026/27This article is part of our Starting a Business guide. See the full topic for related reads.