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. The two-layer system can be tax-efficient at higher profit levels but adds administrative cost.

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 (down from £1,000), then 8.75% basic, 33.75% higher, 39.35% additional rate. 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, sole-trader is cheaper below ~£40,000 of net profit because you avoid corporation tax + dividend tax stacking and accountancy fees. Above ~£60,000 the limited-company route usually wins on tax alone. Between £40k and £60k it depends on whether you need to extract all profit or can leave some retained for future investment. 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.