Limited Company vs Sole Trader UK

A sole trader pays income tax (20/40/45%) and Class 4 NI (6%/2%) on all profits. A limited company pays corporation tax (19% small profits, 25% main rate above £250k, marginal between) on profits, then the owner pays personal tax on whatever is taken out as salary or dividend. Stacking the two layers no longer beats the single sole-trader layer once profit is fully extracted — the case for a company is limited liability, retained profit, and employer pension contributions, not a lower extraction bill.

For both 2025-26 and 2026-27, corporation tax is 19% on profits up to £50,000 (small profits rate), 25% on profits above £250,000 (main rate), and a marginal-relief calculation in between (effective rate rises smoothly from 19% to 25%). Associated companies share the £50k / £250k thresholds equally.

After paying corporation tax, dividends paid to a director/shareholder face dividend tax personally: £500 dividend allowance, then from 6 April 2026 (2026-27) 10.75% basic, 35.75% higher, 39.35% additional rate — up 2 percentage points at basic and higher from 2025-26's 8.75% / 33.75% / 39.35% (Autumn Budget 2025). Adding salary first uses up the Personal Allowance, so dividends sit on top.

A small salary up to the NI Secondary Threshold (£5,000 for 2025-26) — counts as a qualifying year for State Pension via Class 1 NI credits with no NI cost — plus dividends for the rest. Above the salary, you pay corporation tax on the profit then dividend tax. Note: salary is also limited by the Employer NI Secondary Threshold (£5,000) — going above triggers 15% employer NI, often making it cheaper to take dividends instead.

IR35 targets people who run a limited company but work like an employee for a single client. Inside IR35, the engaging client (or agency) deducts PAYE/NI from the contract value before paying the company — wiping out most of the tax efficiency. Outside IR35, normal company rules apply. Since April 2021, medium/large engagers determine status; small engagers leave the contractor responsible.

Typical annual cost: £150-£300 accountant for compliance only, £500-£1,500 for full bookkeeping + tax planning, plus Companies House fees (free incorporation if direct, £15 confirmation statement annually), and the £100 director registration if you incorporate via an agent. Plus extra time for board minutes, statutory accounts, and corporation tax returns.

For most service businesses that extract all their profit, sole-trader status is now cheaper across the whole range. On tax alone in 2026-27, the limited company is ahead only between about £60,500 and £60,500 of profit, and by at most £0 a year — far less than the extra accountancy cost, so in practice sole trader wins across the range. The old "limited company wins above roughly £60,000" rule of thumb predates three changes that all pushed the other way: Class 4 NI cut to 6%, employer NI raised to 15% from a £5,000 secondary threshold, and dividend rates raised to 10.75% / 35.75% on 6 April 2026. The limited company's remaining advantages are non-tax ones — limited liability, retaining profit inside the company at the 19% corporation tax rate instead of extracting it, and employer pension contributions. Use our contractor comparison calculator for your numbers.

Yes. Going sole-trader → limited: incorporate at Companies House, transfer assets, register for corporation tax, and consider incorporation relief on goodwill. Going limited → sole trader: cease trading, distribute remaining assets (potential capital distribution if winding up via MVL), close the company. Both directions need careful timing around VAT registration thresholds and retained profits.