Sole Trader vs Limited Company Tax in the UK: The 2026/27 Verdict

Choosing between sole trader and limited company status is one of the biggest financial decisions a UK small-business owner makes. For years, the standard advice was simple: once profits pass a certain point, incorporate and pay less tax. The 2026/27 tax year has changed that maths. Here is the direct answer.

As of the 2026/27 tax year, a sole trader who withdraws all their profit keeps slightly more of it than a limited company director on the same profit, at every level from £30,000 to £150,000. The dividend tax rise from 6 April 2026 (10.75% basic, 35.75% higher, 39.35% additional) has erased the old tax crossover point for full extraction. A limited company still wins when you retain profits, fund a pension, or split income, and for the non-tax reasons that matter just as much.

Those figures use announced 2026/27 rates. Verify current rates with HMRC or on gov.uk before you act, because Budgets can move them. This article walks through the exact numbers, the rates behind them, and the factors beyond tax that should drive your decision.

What Is the Tax Difference Between a Sole Trader and a Limited Company?

A sole trader and a limited company are taxed as two completely different things. That is the whole story in one sentence.

A sole trader pays income tax on all profit through Self Assessment, plus Class 4 National Insurance (6% on profits between £12,570 and £50,270, 2% above that) and Class 2 National Insurance (£3.50 a week in 2025/26; confirm the 2026/27 figure on gov.uk). There is no separation between you and the business. Every pound of profit is your income in the year you earn it.

A limited company pays corporation tax on its profits first (19% on the first £50,000, an effective 26.5% on profits between £50,000 and £250,000 through marginal relief, and 25% above that, as announced for 2026/27). You then pay yourself, usually as a small salary plus dividends, and pay personal tax on those dividends. The company is a separate legal person. Profits you leave inside it are only taxed at corporation tax rates until you take them out.

That separation creates two layers of tax on extracted money, which is exactly why the dividend rates matter so much.

What Are the 2026/27 Tax Rates You Need to Know?

Before the worked examples, here are the rates used throughout this article. All are presented as announced for the 2026/27 tax year (6 April 2026 to 5 April 2027). Check HMRC for the latest position.

The single biggest change is the dividend tax rise. The basic rate moved from 8.75% to 10.75%. That two-point rise is what killed the old crossover points that most ranking articles still quote. If a guide you read online still uses 8.75% and 33.75%, its “when to switch” advice is out of date.

How Much Tax Does a Sole Trader Pay at Each Profit Level?

The table below shows total tax and National Insurance for a sole trader with no other income and no pension contributions, using the rates above. Figures are rounded to the nearest pound.

A few things to note. At £100,000 and above, the personal allowance starts to taper away (£1 lost for every £2 of income over £100,000), which is why the £150,000 income tax figure jumps so sharply. And the effective rate climbs fast: about 16% of profit at £30,000, rising to about 35% at £150,000.

Your real bill will differ if you claim expenses, make pension contributions, or have other income. Allowable expenses reduce the profit figure these rates apply to, which is why good record keeping matters. Our guide to tax planning strategies for small business owners covers the legitimate ways to bring that bill down.

How Much Tax Does a Limited Company Director Pay?

The standard tax-efficient extraction for a one-director company is a salary at the personal allowance (£12,570) plus the rest as dividends. The salary has no income tax and no employee NICs at that level, though the company pays employer NICs of 15% on the slice above £5,000 (about £1,136), which is deductible against corporation tax.

Here is what that looks like at each profit level, assuming all post-tax profit is paid out as dividends. Rounded to the nearest pound.

How the numbers work, in brief: the £12,570 salary and £1,136 employer NICs are deducted before corporation tax. At £75,000, for example, £50,000 of taxable profit is charged at 19% and the rest at the 26.5% marginal rate. Dividends above the £500 allowance are taxed at 10.75% inside the basic rate band and 35.75% above it. At £150,000 the personal allowance is fully withdrawn, so part of the salary is taxed at 20% too.

The salary-plus-dividends mix is only one approach. A full breakdown of the options lives in our companion guide (salary vs dividends for limited company directors, coming soon at https://theriser.co.uk/salary-vs-dividends-limited-company-uk/).

Head to Head: The True Crossover Points for 2026/27

Put the two tables together and the honest answer emerges.

There is no tax crossover point for full extraction in 2026/27. The sole trader keeps more at every level shown. The gap widens as profits rise because the higher dividend rate (35.75%) stacks on top of corporation tax at 26.5%, producing a combined burden well above the 42% a higher-rate sole trader pays (40% income tax plus 2% Class 4 NICs).

This is the finding that most existing guides miss, because they still run the old 8.75% and 33.75% dividend rates. Under those old rates, the limited company pulled ahead somewhere around £50,000 to £60,000 of profit. Under the announced 2026/27 rates, that advantage is gone for directors who take everything out.

Three caveats keep this honest. First, these are worked examples with fixed assumptions, not advice for your situation. Second, the dividend rates are announced rates; confirm them with HMRC before relying on them. Third, and most important, full extraction is not the only way to run a company. The next section is where limited companies fight back.

When Does a Limited Company Still Win on Tax?

The tables above assume you withdraw every pound. Real businesses do not always work that way, and that is where the company structure earns its keep.

Retaining profits. Money left in the company is taxed only at corporation tax rates: 19% on the first £50,000 of profit. A sole trader cannot do this. Every pound of sole trader profit is taxed personally in the year it is earned, even if it sits in the business bank account. If you earn £100,000 but only need £60,000 to live on, leaving £40,000 inside a company at 19% beats paying 40% income tax plus 2% NICs on it as a sole trader. You can draw it later, perhaps in a leaner year.

Pension contributions. Employer pension contributions from a limited company are deductible against corporation tax and attract no employer or employee NICs. This is one of the most tax-efficient ways to move company money to yourself. A sole trader’s personal pension contributions get basic-rate relief but no NICs saving, and there is no corporation tax deduction because there is no company.

Splitting income. A company can have more than one shareholder or employee. A spouse or partner with unused personal allowance and basic rate band can legitimately receive dividends or salary, multiplying the family’s tax-free allowances. This must reflect genuine shareholding and real involvement; HMRC can challenge artificial arrangements, so take advice before doing it.

Timing and flexibility. Dividends can be voted when it suits you, which lets you smooth income across tax years, for example keeping under the £100,000 personal allowance taper or the additional rate threshold. A sole trader’s profit lands in one year whether they like it or not.

Flat-rate VAT and other schemes are available to both structures, so they do not decide the question either way.

The honest summary: as a pure extraction vehicle in 2026/27, the limited company has lost its edge. As a vehicle for retaining profit, funding pensions and planning across years, it still has powerful tools the sole trader cannot touch.

Beyond Tax: Admin, Liability and Credibility

Tax is only one column in the decision. Many owners incorporate for reasons that have nothing to do with the tax bill.

Admin and cost

A sole trader registers with HMRC for Self Assessment (free), files one tax return a year, and keeps business records. Many manage with a spreadsheet or simple software, at least at first.

A limited company must file annual accounts with Companies House, file a company tax return with HMRC, submit a confirmation statement each year (£13 in 2025/26; confirm the current fee on gov.uk), and keep statutory registers. Most directors use an accountant. Typical accountant fees run roughly £300 to £600 a year for a simple sole trader return, versus roughly £800 to £1,800 a year for a small limited company (accounts, corporation tax, payroll and VAT as needed). Treat those as broad estimates that vary by region and complexity, and get quotes before you commit. If the numbers in this guide make you realise you need professional help, our guide on whether you need an accountant for your small business walks through the decision.

Limited liability

This is the structural reason companies exist. A company’s debts belong to the company. If the business fails, your personal assets (your home, your savings) are generally protected. A sole trader has no such shield; business creditors can pursue your personal assets. The protection is not absolute (personal guarantees on loans and leases are common, and wrongful trading rules apply), but for businesses taking on debt, signing leases or working with large contracts, it matters enormously.

Credibility and growth

Some clients, especially larger corporates and public sector buyers, prefer or require dealing with limited companies. A company structure can make it easier to bring in investors, sell shares, or sell the business later. A sole trader business is harder to transfer because legally it is just you.

The decision table

Contractors and IR35: A Quick Note

If you are a contractor, there is one more tax regime to know about. The off-payroll working rules (IR35) target “disguised employment”: working like an employee but billing through a personal company to save tax. If your contract is inside IR35, you pay broadly employment-level taxes and much of the company advantage disappears.

Incorporating does not sidestep IR35. If you contract through a limited company, each engagement needs an IR35 assessment, ideally with a proper contract review. This is a brief flag, not legal advice; the rules are detailed and the stakes are high, so get specialist advice before you rely on a company structure for contracting.

How to Switch From Sole Trader to Limited Company

If the balance of factors points to incorporating, the process is straightforward.

1. Choose a company name and form the company. Online formation through Companies House costs £12 (confirm the current fee on gov.uk). You will need a registered office address, at least one director, and at least one shareholder.
2. Open a business bank account in the company’s name. Company money and personal money must stay separate from day one.
3. Tell HMRC you are stopping self-employment as a sole trader, and register the company for corporation tax. Transfer or re-register for VAT if applicable.
4. Move contracts, clients and assets across. Notify clients, update contracts and invoices, and transfer business assets. Some transfers can trigger capital gains or stamp duty considerations, so check before you move valuable assets.
5. Set up payroll even if you are the only employee, and register for PAYE.
6. Close out the sole trader books. File a final Self Assessment covering the sole trader period, and keep records for the required retention period.

Many owners time the switch for the start of a tax year to keep the paperwork clean. An accountant can handle the whole transition; see our guide on whether a small business needs an accountant for when that help pays for itself.

Frequently Asked Questions

Is it better to be a sole trader or limited company for tax in the UK?

As of the 2026/27 tax year, a sole trader who withdraws all profit pays slightly less tax than a limited company director on the same profit, at every level from £30,000 to £150,000. That is because the dividend tax rise from April 2026 (10.75% basic, 35.75% higher) stacks on top of corporation tax. The company wins when you retain profits, fund a pension through it, or split income with a partner.

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

There is no single number any more. Under the announced 2026/27 rates there is no pure-tax crossover point for full extraction; the sole trader keeps more at every profit level shown in this guide. Switch for retained profits, limited liability, credibility with clients, or growth plans, not for a tax saving on money you take out.

What are the new dividend tax rates from April 2026?

The announced rates from 6 April 2026 are 10.75% for basic-rate taxpayers, 35.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers, with a £500 dividend allowance. These are announced rates; verify them with HMRC before you rely on them, as Budgets can change them.

Do limited companies pay less tax than sole traders in 2026/27?

On profits that are fully withdrawn, no. Worked comparisons show the sole trader keeping £883 more at £30,000 profit, £1,224 more at £50,000, £1,100 more at £75,000, £3,794 more at £100,000, and £12,804 more at £150,000. On profits retained in the company, the 19% small-profits corporation tax rate beats personal rates, so the answer depends on what you do with the money.

Can I be a sole trader and have a limited company?

Yes. You can run a limited company and also be self-employed as a sole trader for separate work. Each is taxed separately: the company pays corporation tax and you pay personal tax on what you draw from it, while the sole trader profits go through Self Assessment. Keep the records and bank accounts strictly separate.

How much does it cost to run a limited company versus a sole trader?

Formation costs £12 online through Companies House. The ongoing difference is mostly accountancy: roughly £300 to £600 a year for a simple sole trader tax return versus roughly £800 to £1,800 a year for small-company accounts, corporation tax, payroll and VAT. These are broad UK estimates that vary by region and complexity. Add the £13 annual confirmation statement fee.

Do I pay National Insurance as a limited company director?

Yes, in two ways. As an employee of your company you pay employee NICs on salary above the primary threshold (£12,570, frozen until 2028), and the company pays employer NICs at 15% on salary above £5,000. If you take most of your income as dividends, you pay no NICs on the dividend portion, which is one reason the salary-plus-dividends mix is popular.

Is a limited company worth it for £30,000 or £50,000 profit?

On tax alone, no, under 2026/27 rates; the sole trader keeps more at both levels. It can still be worth it for limited liability, professional credibility, or if you plan to grow and retain profits. At these profit levels the extra admin cost eats most of any benefit, so be clear about your non-tax reasons.

What happens to my sole trader business when I incorporate?

You close the sole trader business with HMRC and start trading through the company. You file a final Self Assessment for the sole trader period. Business assets move to the company, which can have capital gains implications. Contracts, bank accounts and VAT registration need updating. Many owners make the switch at the start of a tax year.

Should I take salary or dividends as a company director?

Most one-director companies take a salary around the personal allowance (£12,570) and the rest as dividends, because dividends carry no NICs. The exact optimum depends on your other income, pension plans and the current thresholds. Our companion guide on salary vs dividends for limited company directors (coming soon at https://theriser.co.uk/salary-vs-dividends-limited-company-uk/) covers the full calculation.

Does a limited company protect my personal assets?

Generally yes. The company’s debts are its own, so creditors cannot normally pursue your home or savings if the business fails. The main exceptions are personal guarantees (common on loans and leases), and directors can be personally liable for wrongful or fraudulent trading. It is strong protection, not total immunity.

Do I need an accountant if I switch to a limited company?

It is not a legal requirement, but most directors get one. Company accounts, corporation tax, payroll and dividend paperwork carry more deadlines and more penalties for mistakes than a sole trader return. See our guide on whether your small business needs an accountant for the cost bands and the trigger points.

Conclusion

The 2026/27 tax year rewrote the old rulebook. With dividend tax at 10.75% basic and 35.75% higher from April 2026, the traditional tax advantage of the limited company for full extraction has gone; a sole trader keeps more at every profit level in our worked comparisons. But tax on withdrawn profit was never the whole picture. Retained profits at 19% corporation tax, NICs-free employer pension contributions, income splitting, limited liability and credibility still make the company structure the right call for many owners.

Run your own numbers with the rates in this guide, weigh the non-tax factors honestly, and get professional advice before you incorporate or restructure.

This article is general information only, not financial advice. Tax rates and thresholds are announced figures for the 2026/27 tax year; verify current rates with HMRC or on gov.uk before making decisions. Everyone’s circumstances differ, so consider speaking to a qualified accountant before choosing a business structure.