Quick answer: If you take all your profit out of the business, a limited company saves little or no tax in 2026/27, and at some profit levels it costs more. That’s mainly because dividend tax rose by two percentage points in April 2026. A company still makes sense if you can leave profit in the business, want to pay into a pension through it, or need limited liability.
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In this guide
- How is a sole trader or limited company taxed?
- Which leaves me more money in 2026/27?
- When does a limited company still make sense?
- When is staying a sole trader the better choice?
- What else should I think about before going limited?
How is a sole trader or limited company taxed?
As a sole trader, you and the business are the same thing. You pay Income Tax and Class 4 National Insurance on all of your profit, whether you spend it or leave it in the bank.
A limited company is a separate legal person. It pays Corporation Tax on its profit. You then pay personal tax on whatever you take out, usually a small salary plus dividends.
| 2026/27 | Sole trader | Limited company |
|---|---|---|
| Tax on profit | Income Tax at 20%, 40% or 45% | Corporation Tax at 19% up to £50,000, 25% above £250,000, with marginal relief in between |
| National Insurance | Class 4 at 6% on profit from £12,570 to £50,270, then 2% | Employer NI at 15% on salary above £5,000. None on dividends |
| Tax when you take money out | None, it’s already taxed | Dividends taxed at 10.75%, 35.75% or 39.35% after a £500 allowance |
| Liability | Unlimited: your personal assets are at risk | Usually limited to what you put in |
| Paperwork | One Self Assessment return | Annual accounts, Corporation Tax return, confirmation statement, payroll and your own tax return |
The big change this year: the dividend rates were 8.75% and 33.75% until April 2026. Each £1,000 of dividends in those bands now costs £20 more in tax, which has narrowed the gap that used to make companies attractive.
Which leaves me more money in 2026/27?
Here’s what one person ends up with at three profit levels, if they take all the profit out.
| Profit before tax | Sole trader take-home | Limited company take-home | Difference |
|---|---|---|---|
| £40,000 | £32,868 | £31,633 | Sole trader £1,235 better off |
| £60,000 | £46,111 | £46,091 | Roughly the same |
| £100,000 | £69,311 | £65,210 | Sole trader £4,102 better off |
How we worked it out. These are examples using 2026/27 rates for England, Wales and Northern Ireland. One owner with no other income. The company pays a salary of £12,570, pays employer National Insurance on it (a one-director company can’t claim the Employment Allowance), pays Corporation Tax, then pays out everything that’s left as dividends. No pension contributions, and accountancy fees are left out, though they’re usually higher for a company.
Take the £60,000 example. The sole trader pays £11,432 Income Tax and £2,457 National Insurance. The company pays £1,136 employer National Insurance and £8,796 Corporation Tax, and the director then pays £3,977 dividend tax. The totals land within about £20 of each other.
So if you need every pound of profit to live on, a company on its own isn’t a tax saving in 2026/27.
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When does a limited company still make sense?
You don’t need all the profit now. Money left in the company has only paid Corporation Tax at 19% to 26.5%. As a sole trader, the same slice of profit above £50,270 is taxed at 42% (40% Income Tax plus 2% National Insurance) the moment you earn it. If your profit is well above what you live on, a company lets you build up savings, fund growth or smooth out a lumpy year.
You want to pay into a pension. The company can pay into your pension directly. It’s a business expense for Corporation Tax and carries no National Insurance, which is often the single biggest saving available to directors.
You need limited liability. If you take on contracts, staff, premises or borrowing where things could go wrong, keeping business debts separate from your home and savings is worth a lot more than a tax saving.
Your clients insist on it. Some larger businesses and agencies will only work with limited companies. If you’re a contractor, check whether the IR35 rules would apply to your contracts before you set one up.
When is staying a sole trader the better choice?
- You take out most or all of your profit to live on.
- Your profit is under about £50,000.
- You want simple paperwork and lower accountancy fees.
- You’d rather keep your details off the public register. Company directors and accounts appear on Companies House.
There’s no prize for being “limited”. Plenty of successful businesses run as sole traders for years.
What else should I think about before going limited?
- Admin and cost. A company means payroll, annual accounts filed at Companies House, a Corporation Tax return and a confirmation statement every year, as well as your own tax return. Expect higher accountancy fees, so build them into the comparison.
- The money isn’t yours. Company money belongs to the company. Taking it out other than as salary, dividends or expenses can create a director’s loan, which can carry extra tax if it isn’t repaid in time.
- Moving an existing business. Transferring equipment, vehicles, stock or goodwill into a new company has tax points to plan, and the timing matters.
- Scotland. Scottish income tax bands apply to a sole trader’s profit and a director’s salary, so the comparison shifts slightly. Dividend tax and Corporation Tax are the same across the UK.
- Making Tax Digital. Sole traders and landlords with gross income over £30,000 join Making Tax Digital for Income Tax from April 2027. That’s a reason to get your records in order, not on its own a reason to go limited.
What to do next
- Work out your expected profit for this year and next.
- Decide how much of it you actually need to take out to live on.
- Note any plans that need protection: staff, premises, borrowing, big contracts.
- Think about how much you’d like to pay into a pension.
- Get both options modelled with your own numbers before you register anything.
How we can help
We compare both structures using your actual figures, including pension contributions and how much you’d leave in the business, and we’ll tell you plainly if staying a sole trader is the better choice. If a company is right, we set it up, register it for Corporation Tax and payroll, and plan your salary and dividends for the year. If you stay a sole trader, we handle your Self Assessment and Making Tax Digital. Either way you get a fixed price up front, payable over 12 monthly instalments if you prefer. See our services or our prices.
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Frequently asked questions
Can I start as a sole trader and switch to a limited company later? Yes, and many people do. Moving an existing business into a company needs some planning around assets, goodwill and timing, so speak to an accountant before you set the company up.
Do I pay National Insurance as a company director? On salary, yes, once it passes the National Insurance thresholds, and the company pays employer National Insurance at 15% on salary above £5,000 in 2026/27. Dividends carry no National Insurance.
Is the VAT threshold different for a limited company? No. The VAT registration threshold is £90,000 of taxable turnover for both sole traders and limited companies.
Is a limited company better for getting a mortgage? Not necessarily. Lenders usually want two years of accounts either way, and as a director, many lenders look at your salary and dividends, though some will consider your share of the company’s profit. Switching structure shortly before applying can make things harder, not easier.
Do the rates differ in Scotland? Scotland has its own income tax bands, which apply to a sole trader’s profits and a director’s salary. Dividend tax and Corporation Tax are the same across the UK.
This guide is general information based on the rules for the 2026/27 tax year, checked on 1 October 2026. It isn’t personal advice. Tax rules change and your situation may differ, so speak to us before acting on it.
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