You earn £50,000 a year from your business. As a sole trader, you hand over roughly £11,500 in income tax and National Insurance. As a limited company director paying yourself through salary and dividends, that drops to around £8,200. The difference is £3,300 - and it only grows as your profits climb.
TL;DR: Sole traders are simpler and cheaper to run, but limited companies pay less tax once profits pass roughly £30,000-£35,000. The trade-off is more admin, more regulation, and higher accounting costs. Your decision should factor in profit level, risk exposure, and how you plan to grow.
What Is the Tax Difference in 2026-27?
The gap between the two structures comes down to how profits are taxed.
Sole traders pay income tax at 20%, 40%, or 45% on all their profits, plus Class 4 National Insurance at 6% on profits between £12,570 and £50,270, and 2% above that (GOV.UK, 2026). There is no separation between you and the business - every pound of profit is your taxable income.
Limited company directors split their income. The company pays corporation tax at 19% on profits up to £50,000, rising to 25% above £250,000 (GOV.UK, 2026). The director then takes a small salary - typically £12,570 to use the personal allowance - and draws the rest as dividends, taxed at 10.75% for basic rate taxpayers or 35.75% at the higher rate (GOV.UK, 2026).
At What Profit Level Does a Limited Company Save Money?
For most people, the crossover sits between £30,000 and £35,000 in annual profit.
Below £30,000, the tax savings from a limited company are small - often wiped out by higher accountancy fees (typically £800-£1,500 a year compared with £200-£400 for a sole trader). Above £50,000, the savings become meaningful. A director earning £80,000 through a limited company can keep £3,000-£8,000 more per year than a sole trader on the same profit, depending on how they structure salary and dividends (1st Formations, 2026).
In our experience, the clients who benefit most from incorporating are those with stable, predictable profits above £40,000 who don't need to draw every penny from the business each month.
How Does the Salary-Plus-Dividends Strategy Work?
The most tax-efficient approach for 2026-27 is to pay yourself a salary of £12,570 - equal to the personal allowance and the NIC primary threshold - then take the rest as dividends.
On that salary, you pay zero income tax and zero employee National Insurance. The company pays employer NIC of 15% on the portion above the £5,000 secondary threshold, which works out to £1,135.50 per year (ContractorUK, 2026). That salary is also a deductible expense, reducing your corporation tax bill.
Dividends above the £500 tax-free allowance are then taxed at 10.75% or 35.75% - with no National Insurance on dividends at all. That NIC saving is the main reason limited companies pay less overall.
What Are the Non-Tax Differences?
Tax is only one factor. The two structures differ in several practical ways.
Liability
A sole trader is personally liable for all business debts. If the business fails, creditors can pursue your personal assets - your home, savings, car. A limited company is a separate legal entity. Your liability is limited to what you have invested in the company, provided you have not given personal guarantees.
Admin and Filing
Sole traders register with HMRC and file a Self Assessment return once a year. Limited companies file annual accounts with Companies House, a Corporation Tax return with HMRC, a Confirmation Statement, and maintain statutory registers. From April 2026, Making Tax Digital adds quarterly digital reporting for sole traders earning above £50,000 too.
Privacy
Limited company details - including your name, address, and annual accounts - are on the public register at Companies House. The register held 5.43 million companies at March 2025 (Companies House, 2025). Sole trader finances remain private.
Who Should Stay as a Sole Trader?
Sole trader status works well if your profits are under £30,000, your business carries low risk, and you want minimal paperwork. Freelancers, consultants, and tradespeople with straightforward income often find this is the right fit.
What we see most often is clients staying as sole traders when they are testing a business idea or earning a side income alongside employment. The simplicity is worth more than the modest tax saving a company structure would provide.
The 5.63 million self-employment income sources recorded by HMRC for 2022-23 confirm that sole trading remains the most common business structure in the UK by a wide margin.
When Should You Incorporate?
Consider forming a limited company when profits consistently exceed £35,000, when you want liability protection, or when you plan to bring on investors or partners. Retaining profits inside a company for future investment is also easier - you only pay corporation tax on what the company earns, and can time your personal withdrawals.
One question clients always ask is whether they should incorporate before they hit the higher profit thresholds. Our answer: if you expect profits to grow past £40,000 within the next year and you can handle the extra admin, starting as a limited company avoids the hassle of switching later. But do not incorporate purely for a small tax saving - the accounting fees and compliance burden need to be worth it.
If you do incorporate, make sure you understand year-end filing requirements and the penalties for late Corporation Tax returns, which doubled from April 2026.
What About MTD and the April 2026 Changes?
From 6 April 2026, sole traders and landlords earning over £50,000 must comply with Making Tax Digital for Income Tax. That means quarterly digital submissions through compatible software instead of a single annual return.
This threshold drops to £30,000 from April 2027 and £20,000 from April 2028 (ICAEW, 2026). Limited companies are not currently within the MTD for Income Tax scope - they already file digitally for Corporation Tax and VAT.
The dividend tax rates also rose in April 2026, adding 2 percentage points at both the basic and higher rate bands. That narrows the gap between the two structures slightly, but limited companies still come out ahead on overall tax at higher profit levels.
Frequently Asked Questions
Can I switch from sole trader to limited company mid-year?
Yes. You can incorporate at any point during the tax year. Your sole trader business ceases on the incorporation date, and you file a final Self Assessment for the period you traded as a sole trader. The limited company starts its own accounting period from the date of incorporation.
Do I need an accountant for a limited company?
There is no legal requirement, but the filing obligations are significantly more involved than a sole trader return. Most limited company directors use an accountant. Expect to pay £800-£1,500 per year for a small company, compared with £200-£400 for a sole trader return.
Can I pay less National Insurance through a limited company?
Yes - that is the single biggest tax advantage. Dividends are not subject to NIC, so by paying a low salary and drawing the rest as dividends, you avoid most of the 6% Class 4 NIC that a sole trader would pay. At £60,000 profit, that saving alone is worth roughly £2,500 a year.
What happens to my sole trader losses if I incorporate?
Sole trader losses cannot be transferred to a limited company. You need to use any trading losses against your personal income before incorporation. Timing the switch carefully matters - talk to your accountant before committing to a date.
Is a limited company better for getting a mortgage?
Lenders assess sole traders on their net profit and limited company directors on their salary plus dividends. Some lenders will also consider retained profits. In practice, sole traders earning the same amount often find mortgage applications slightly simpler because their full profit shows on their tax return.
Need help deciding which structure fits your situation? Get in touch - we compare the numbers for sole trader and limited company side by side and give you a clear recommendation based on your actual profit, growth plans, and risk profile.