Sole trader vs limited company: tax compared (2026/27)

In short: In 2026/27 a sole trader pays Income Tax and Class 4 National Insurance on the business's profits. A limited company pays 19% to 25% Corporation Tax, and its owner then pays dividend tax from 10.75% (GOV.UK: Tax on dividends: Check if you have to pay tax on dividends). In Taxley's example of one owner taking out all of £50,000 profit, the sole trader pays £1,406.25 less tax.

Rates checked on GOV.UK on 29 September 2026. Already running a company? Take the 30-second check to see whether Taxley fits your company.

How are a sole trader and a limited company taxed differently?

A sole trader pays Income Tax and Class 4 National Insurance on all the business's profit through Self Assessment. A limited company pays Corporation Tax of 19% on profits up to £50,000, then its owner pays Income Tax on any salary and dividend tax on dividends, which starts at 10.75% in 2026/27.

This table compares the two structures for one owner in 2026/27:

A sole trader is taxed on the business's profit, not on the money drawn from it. For 2026/27 the personal allowance is £12,570, the basic rate of 20% runs to £50,270, the higher rate of 40% to £125,140, and 45% applies above that; the allowance falls by £1 for every £2 of income over £100,000, and Scotland has its own bands (GOV.UK: Income Tax rates and Personal Allowances). Class 4 National Insurance is 6% on profits between £12,570 and £50,270 and 2% above. Class 2 contributions are treated as paid once profits reach £7,105, so there is nothing to pay, and anyone below that can pay £3.65 a week voluntarily (GOV.UK: Self-employed National Insurance rates). From 6 April 2026, sole traders and landlords whose self-employment and property income before expenses was over £50,000 in 2024/25 must also use Making Tax Digital for Income Tax (GOV.UK: When you need to use Making Tax Digital for Income Tax).

A company pays Corporation Tax at 19% on taxable profits up to £50,000 and 25% above £250,000, with marginal relief in between; both limits are reduced for short accounting periods and by the number of associated companies (GOV.UK: Corporation Tax rates, expenses and reliefs: Rates). A salary paid to a director is normally a deductible cost for the company, so it lowers the Corporation Tax bill, but it brings payroll taxes. Employer National Insurance is 15% on pay above £5,000 a year, and employee National Insurance is 8% on pay from £12,570 to £50,270 (GOV.UK: Rates and thresholds for employers 2026 to 2027). The Employment Allowance, which reduces employer National Insurance, can't be claimed where a company's only director is also the only employee it pays secondary Class 1 contributions on (GOV.UK: Employment Allowance: Check if you're eligible), so a one-person company pays the full 15%.

Dividends work differently. They are paid to shareholders from profit left after Corporation Tax, they can't be counted as a business cost, and a company must not pay out more than its available profits from the current and previous years (GOV.UK: Taking money out of a limited company). The shareholder then pays dividend tax on anything above the £500 dividend allowance: 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band (GOV.UK: Tax on dividends: Check if you have to pay tax on dividends). The first two rates rose from 8.75% and 33.75% on 6 April 2026 (GOV.UK: Income Tax rate changes: property, savings and dividend income), which makes taking profit out as dividends dearer than it was in 2025/26.

Which pays less tax in 2026/27, a sole trader or a limited company?

At £50,000 of profit in 2026/27, a sole trader with no other income pays less. Income Tax and Class 4 National Insurance come to £9,731.80, while a one-director company paying a £12,570 salary and the rest as dividends pays £11,138.05 in employer NI, Corporation Tax and dividend tax. The company route costs £1,406.25 more, before its higher running costs.

Assumptions: the 2026/27 tax year and the Income Tax bands for England, Wales and Northern Ireland. One owner with no other income, no student loan and no pension contributions, under State Pension age and paying standard category A National Insurance. The business makes £50,000 of taxable profit before paying the owner, whichever structure it uses. The company has a 12-month accounting period taxed at 19%, no associated companies, and one director who is its only employee, so it can't claim the Employment Allowance (GOV.UK: Employment Allowance: Check if you're eligible). It pays all its profit after tax as dividends in the same tax year and has the distributable profits and cash to do so. Company running costs, such as accountancy and the Companies House fee, are left out. Figures are rounded to the penny.

Taxley's worked example, an illustration at £50,000 of profit in 2026/27, compares the two routes:

The sole trader's Income Tax is (£50,000 − £12,570) × 20% = £7,486.00, and Class 4 is (£50,000 − £12,570) × 6% = £2,245.80 (GOV.UK: Self-employed National Insurance rates). For the company, employer NI is (£12,570 − £5,000) × 15% = £1,135.50. Salary and employer NI are deducted, leaving taxable profit of £36,294.50 and Corporation Tax at 19% of £6,895.96. The remaining £29,398.54 is paid as dividends. The salary uses the whole personal allowance, so the dividends sit in the basic rate band: (£29,398.54 − £500) × 10.75% = £3,106.59 (GOV.UK: Tax on dividends: Check if you have to pay tax on dividends). Total tax is £1,135.50 + £6,895.96 + £3,106.59 = £11,138.05, and the owner keeps £12,570 + £29,398.54 − £3,106.59 = £38,861.95. The company route therefore costs £11,138.05 − £9,731.80 = £1,406.25 more.

The £12,570 salary uses the personal allowance with no Income Tax or employee National Insurance, and at 19% the Corporation Tax it saves outweighs its £1,135.50 of employer NI. A £5,000 salary avoids employer NI altogether, but Corporation Tax rises to £8,550.00 and dividend tax to £3,050.85, a total of £11,600.85, which is £462.80 more. A salary of at least £6,708, the 2026/27 lower earnings limit, also protects your National Insurance record (GOV.UK: National Insurance: introduction: Overview). The salary or dividends guide compares the next £10,000 of company profit paid either way. This example is an illustration, not advice: pension contributions, other income, a second employee that makes the Employment Allowance available, or leaving profit in the company would each change the answer, as would Scottish Income Tax bands for the sole trader.

When does a limited company become worth it?

On 2026/27 rates, a one-owner limited company rarely saves tax if all the profit is paid out each year. In Taxley's calculation it cost more than sole trading at every profit tested from £20,000 to £300,000, except just above £60,000, where it saved at most £16. It can pay off mainly when profit stays in the company.

Three 2026/27 figures explain the result. Dividend tax rose to 10.75% and 35.75% from 6 April 2026 (GOV.UK: Income Tax rate changes: property, savings and dividend income), employer National Insurance takes 15% of salary above £5,000, and a sole trader's Class 4 is only 6%, then 2% above £50,270. The two routes meet just above £60,000 because a sole trader reaches the 40% band at £50,270 of profit, while the director's salary and dividends stay in the basic rate band until profit reaches about £60,250. Above that, the director's dividends move to 35.75% on profit that has already borne Corporation Tax at 19% or more, and the gap widens again. The scan used a £12,570 salary, full payout as dividends and the other assumptions of the £50,000 example, checking every £10 of profit.

The saving comes from profit you don't need to spend. Each extra £1,000 of profit above £50,270 costs a sole trader £420 in Income Tax and Class 4 (40% plus 2%) (GOV.UK: Income Tax rates and Personal Allowances), whether or not the money is spent. Left in a company with taxable profits under £50,000, the same £1,000 bears £190 of Corporation Tax at 19% (GOV.UK: Corporation Tax rates, expenses and reliefs: Rates), and dividend tax arises only when it's paid out, which may be in a later tax year. That is a deferral, not an exemption. Company pension contributions, a second employee who makes the Employment Allowance available, and the protection of limited liability are the other common reasons to incorporate. Set these against the extra yearly costs, which the limited company running costs guide totals: the switch pays only when the saving on profit left in the company clearly exceeds them.

What are the non-tax differences between a sole trader and a limited company?

The biggest non-tax difference is liability. A sole trader is personally responsible for all the business's debts, while a company owner's liability is limited to what they invested. A company also files more each year, including accounts at Companies House, and its directors' names, month and year of birth and accounts go on the public register.

GOV.UK describes a sole trader's position as "unlimited liability", while company owners are responsible for business debts only up to the value of their financial investment (GOV.UK: Set up a business). The price of that protection is separation. There must be a clear division between the company's finances and the directors' own, and GOV.UK says the simplest way to keep them apart is a business bank account (GOV.UK: Company and accounting records: your responsibilities). You can't simply draw money as a sole trader does: it comes out as salary through payroll, as dividends that can't exceed the company's available profits, or as a director's loan (GOV.UK: Taking money out of a limited company). Each route has its own paperwork, so the owner decides how much to take and in which form.

Filings grow too. Directors must prepare annual accounts, file them and the Company Tax Return, and file a confirmation statement (GOV.UK: Directors' responsibilities running a limited company). A company must register as an employer even if its only employee is its sole director (GOV.UK: Register as an employer), and dividends over £10,000 also mean a personal Self Assessment return (GOV.UK: Tax on dividends: How to report tax on dividends). A sole trader, by contrast, files one Self Assessment return a year: the online return for 2025/26 is due by 31 January 2027 (GOV.UK: Self Assessment tax returns: Deadlines), with quarterly updates added for those in Making Tax Digital for Income Tax. The one-person limited company guide sets out how a sole director handles the company side without an accountant, and when one is worth paying for.

Privacy changes as well. The Companies House register shows each director's name, nationality, month and year of birth and a service address; the home address and full date of birth are kept on a private register (GOV.UK: Your personal information on the Companies House register). Companies House says all information in the accounts will appear on the public record. Small companies don't currently have to deliver their profit and loss account, but from 1 April 2028 they must deliver it, with an option not to publish it (GOV.UK: Preparing and filing Companies House accounts). A sole trader files no accounts at Companies House, so the business's figures are reported only to HMRC. For owners who value privacy, that difference can matter as much as the tax.

How do you switch from sole trader to limited company?

You switch by forming a new company, moving the business into it and closing the sole trade. Register the company at Companies House, which costs £100 online, register it for Corporation Tax within 3 months of starting business, then tell HMRC the sole trade has stopped and file a final Self Assessment return for it.

How to switch from sole trader to limited company:

1. Register the company at Companies House for £100 online
2. Open a business bank account in the company's name
3. Register for Corporation Tax within 3 months of starting business
4. Set up PAYE payroll before the company's first payday
5. Transfer contracts, assets and the VAT registration to the company
6. Tell HMRC the sole trade has stopped, then file its final return

Registering a private limited company costs £100 online or through software and £124 on paper, and the yearly confirmation statement costs £50 online (Companies House fees). Each director verifies their identity as part of the incorporation, which is free through GOV.UK One Login (GOV.UK: Verifying your identity for Companies House). Open the company's own bank account next, because there must be a clear division between the company's money and yours (GOV.UK: Company and accounting records: your responsibilities). Customers then need to contract with and pay the company rather than you, and a company's invoices must show its full name as it appears on the certificate of incorporation (GOV.UK: What an invoice must include). Update contracts, supplier accounts and payment details before the first invoice goes out.

HMRC says you must tell it within 3 months of starting the company's accounting period once the company is active (GOV.UK: Corporation Tax: trading and non-trading). Starting business includes buying, selling, advertising, renting a property and employing someone, and the date you give HMRC starts the company's first accounting period (GOV.UK: Add Corporation Tax to your business tax account). Payroll comes next if you'll take a salary. Register the company as an employer before the first payday, but no more than 2 months before you start paying people, even if the only person on the payroll is you (GOV.UK: Register as an employer). Pick the salary before the first payday, because it sets the employer National Insurance the company pays.

To keep the VAT number, register the company for VAT and send form VAT68 to transfer the registration (GOV.UK: Register for VAT: Transfer your VAT registration); otherwise the sole trader's registration must be cancelled. Moving business assets to the company can create a capital gain. Incorporation Relief can defer it when the business passes to the company as a going concern, with all its assets except cash, in exchange for shares (TCGA 1992 s162). For transfers on or after 6 April 2026 the relief is no longer automatic: the Finance Act 2026 requires a claim by the first anniversary of the 31 January after the tax year of the transfer, so by 31 January 2029 for a 2026/27 transfer (FA 2026 s39). HMRC expects the claim in the tax return (CG65735). Moving goodwill, property or equipment, or claiming the relief, is where paying an accountant is most often worth it. Finally, tell HMRC online that you've stopped trading as a sole trader and send that year's Self Assessment return (GOV.UK: Stop being self-employed).

What can Taxley do once you run a limited company?

Taxley (taxley.co.uk), UK online software that prepares and files the Company Tax Return (CT600) with HMRC and the annual accounts with Companies House, covers the company's two yearly returns. It doesn't file a sole trader's Self Assessment return, the director's personal return, payroll, VAT returns or the confirmation statement.

Taxley prepares micro-entity (FRS 105), small-company (FRS 102 Section 1A) and dormant accounts, splits a first period of account longer than 12 months into two returns, and files with the company's own Government Gateway login. A new private company's first accounts are due 9 months after the end of its first accounting reference period if they cover 12 months or less; if they cover more than 12 months, they're due 21 months after incorporation, or 3 months after the accounting reference date if that is later (Companies House: Preparing and filing Companies House accounts; CA 2006 s442). Filing the accounts at Companies House, at no extra cost once the return is paid and the accounts are finished, needs the company's 6-character authentication code. Taxley works out section 455 tax on a director's loan that is still outstanding. It is software, not an accountant: it doesn't give tax advice or choose your salary and dividends. Taxley charges one fee per return, shown before you pay and charged only when you choose to file, with no subscription. Take the 30-second check to see whether Taxley fits your company.

Frequently asked questions

Do sole traders still pay Class 2 National Insurance?

Not usually. For 2026/27, Class 2 contributions are treated as paid for self-employed people with profits of £7,105 or more, which protects their National Insurance record without a bill. Anyone with lower profits can choose to pay voluntary Class 2 contributions at £3.65 a week.

Does a company director need a Self Assessment return?

Not just for being a director. Dividends above your unused personal allowance and the £500 dividend allowance must be reported to HMRC. Up to £10,000 you can do that through your tax code or HMRC's helpline; above £10,000 you need a Self Assessment return, as the £50,000 example's dividends would.

Can I keep my VAT number when my business becomes a company?

Yes, if you apply for a transfer. When a business changes its legal entity, you register the company for VAT and send HMRC form VAT68 to ask for the registration number to move across. If you don't transfer it, the sole trader's VAT registration must be cancelled.

Does Making Tax Digital for Income Tax apply to a limited company?

No. It covers sole traders and landlords registered for Self Assessment. From 6 April 2026 it applies where self-employment and property income before expenses was over £50,000 in 2024/25, falling to £30,000 from April 2027 and £20,000 from April 2028.

Can I take money out of a limited company whenever I like?

Not freely. The company's money is separate from yours, so it comes out as salary through payroll, as dividends, or as a director's loan that the company records. A company must not pay more in dividends than its available profits from the current and previous financial years.

General information, not personalised tax or accounting advice.