Sole trader vs limited company

The answer changed in April 2026 #

For most of the last twenty years the tax answer to sole trader vs limited company was simply "company, once you are earning enough". Dividends carried no National Insurance and the dividend rates were low, so extracting profit through a company beat drawing it as self-employed income by a wide margin.

That gap has been closed in stages. The dividend allowance fell from £5,000 to £500.00. The rates rose repeatedly. On 6 April 2026 the ordinary rate went from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%.

Sole trader vs limited company tax, in one paragraph #

Sole trader vs limited company tax works differently on each side. A sole trader pays Income Tax and Class 4 National Insurance on the whole profit. A limited company pays Corporation Tax on its profit, then the director pays Income Tax on any salary and dividend tax on anything taken as dividends.

Sole trader vs limited company UK comparisons written before April 2026 assume the second route wins. Sole trader or limited company UK decisions made today should be checked against current rates rather than carried over from that assumption.

Take-home at different profits #

Both columns start from the same profit, and the company side uses the most efficient salary and dividend split available at each level rather than a fixed salary.

Difference is the company position minus the sole trader position, so a negative figure means the sole trader keeps more. Employment Allowance is not included: tick the box above if it applies.

Where a company still wins: retained profit #

The comparison above assumes you take everything out. That is the worst case for a company and the only case for a sole trader, because a sole trader is taxed on the whole profit whether it is withdrawn or not.

Leave profit in the company and it bears Corporation Tax alone. On £100,000.00 of profit that is 22.75%, against a sole trader's 30.7%. The personal tax is deferred, not avoided, but deferral is worth a great deal if the money is being reinvested or saved for a lean year.

So the honest framing is not "which is cheaper" but "do you need all of it". If you spend everything you earn, a sole trader is usually simpler and cheaper. If you routinely leave money in the business, a company is a better container for it.

The Employment Allowance changes the answer #

A company with an employee other than a single director can claim the Employment Allowance, worth £10,500.00 off employer National Insurance. A sole director company cannot.

That single point swings the comparison at some profit levels, because it makes a much higher salary affordable before employer NI starts to bite. It is the main reason a second person on the payroll, even a part-time one, can change the structural answer as well as the payroll bill.

As a limited company take home calculator this page stops at the comparison. The salary and dividend tax calculator finds the best split once you have decided on a company, and the limited company tax calculator runs the whole chain from turnover.

National Insurance on each side #

Class 2 stopped being a compulsory charge in April 2024. Above the Small Profits Threshold it is treated as paid, so the State Pension record is protected without money changing hands. Below it, paying voluntarily at £3.65 a week is usually the cheapest way to buy a qualifying year, and is worth doing deliberately rather than by accident.

The reasons that are not about tax #

Tax is one input and frequently not the deciding one.

• Limited liability. A sole trader is personally liable for business debts without limit. A company is a separate legal person. Whether that matters depends on what you do and what you owe.
• Who you can work for. Some clients and agencies will not contract with a sole trader at all, which settles the question regardless of the arithmetic.
• Admin cost. A company means annual accounts, a Corporation Tax return, a confirmation statement, payroll if you take a salary, and usually an accountant. Budget for that before counting any saving.
• Privacy. Company accounts and your name as a director are public at Companies House. Sole traders publish nothing.
• IR35. If you work through a company for a single client in an employment-like way, the rules may treat the engagement as employment anyway, which removes the tax advantage entirely.

Umbrella companies #

A third option, and a different thing. An umbrella company employs you and runs you through PAYE, so you pay Income Tax and employee National Insurance as an employee, and the umbrella's costs and employer National Insurance come out of the assignment rate before you see it.

It is almost always the most expensive route in pure tax terms. What it buys is no administration and no filings, which some contractors reasonably value more than the difference, particularly on short assignments or inside IR35.

What this calculator does not cover #

It compares take-home on a single year's profit at 2026/27 rates. It does not model pension contributions, which are one of the strongest arguments for a company and change the answer materially. It does not handle other income, Scottish Income Tax rates, student loan repayments, the High Income Child Benefit Charge, the cost of an accountant, or the tapering of the Personal Allowance above £100,000.

Any of those can move the result. Treat this as the shape of the answer, and take advice before restructuring on the strength of it.

Common questions #

Is a limited company more tax efficient than a sole trader?

Much less often than it used to be. The dividend rates rose two percentage points on 6 April 2026, and at 2026/27 rates a sole trader keeps more than a company director at most profit levels if all the profit is withdrawn. The company still wins where profit is left inside it.

At what profit does a limited company become worth it?

There is no longer a single crossover figure, which is the honest answer. It depends on whether you can claim the Employment Allowance and on how much profit you leave in the company. If you draw everything out and cannot claim the allowance, a company does not beat a sole trader at any normal level of profit in 2026/27.

Why do people still say a limited company saves tax?

Because it did. For years dividends carried no National Insurance and the dividend rates were low enough that the saving was real and large. Successive rises have closed the gap, and the April 2026 increase closed most of what was left. Advice written before that is describing a different regime.

What is the real advantage of a limited company now?

Retaining profit. Money left in the company bears only Corporation Tax, at 22.75% on a £100,000 profit, against a sole trader paying Income Tax and Class 4 on the whole lot whether they spend it or not. Timing, not total.

Does a sole trader pay Class 2 National Insurance?

Not as a charge. Since April 2024, profits at or above the Small Profits Threshold of £7,105 are treated as having paid Class 2, so the State Pension record is protected without any payment. Below that, paying voluntarily costs £3.65 a week.

Can I change from sole trader to limited company later?

Yes, and most people do it that way round. Incorporating is straightforward. Going back the other way is messier, so the usual advice is to stay a sole trader until there is a clear reason not to be.

Is limited liability worth it on its own?

Often, yes, and it is a separate question from tax. A sole trader is personally liable for business debts without limit. Whether that risk matters depends on what you do, what you owe, and what insurance you carry.