Choosing between sole trader and limited company is one of the most consequential financial decisions a self-employed person faces. The limited company structure is more tax-efficient at higher profit levels — but comes with meaningfully more administration and legal responsibility. Here is a structured guide to help you decide.
How Each Structure Is Taxed
Sole trader: All business profits are added to your income and taxed through Self Assessment. You also pay Class 4 National Insurance on profits above £12,570 (6% up to £50,270, 2% above). Class 2 NI is not payable at these profit levels — mandatory Class 2 was abolished from 6 April 2024, so anyone with profits at or above the £7,105 Small Profits Threshold (2026-27) gets a free National Insurance credit rather than paying anything; only those below that threshold have the option to pay voluntary Class 2 at £3.65/week.
Limited company: The company pays Corporation Tax on its profits (25% on profits above £50,000, 19% on profits below £50,000). You then draw money from the company — typically a low salary plus dividends — paying personal tax only on what you extract.
2026-27 Tax Rates
| Tax | Rate |
|---|---|
| Income tax — basic rate | 20% |
| Income tax — higher rate | 40% |
| Income tax — additional rate | 45% |
| Class 4 NI (£12,570–£50,270) | 6% |
| Class 4 NI (above £50,270) | 2% |
| Corporation Tax (up to £50,000) | 19% |
| Corporation Tax (£50,001–£250,000) | Marginal relief applies |
| Corporation Tax (above £250,000) | 25% |
| Dividend allowance | £500 |
| Dividend tax — basic rate | 10.75% |
| Dividend tax — higher rate | 35.75% |
| Dividend tax — additional rate | 39.35% |
(Dividend basic and higher rates rose 2pp from 6 April 2026 under the Autumn Budget 2025 — 8.75%/33.75% were the 2025-26 rates. The additional rate is unchanged at 39.35%.)
Worked Example: £40,000 Profit
Sole trader
- Profits: £40,000
- Income tax: £40,000 - £12,570 = £27,430 × 20% = £5,486
- Class 4 NI: (£40,000 - £12,570) × 6% = £1,646
- Class 2 NI: £0 (profits are above the £7,105 Small Profits Threshold, so Class 2 is a free NI credit, not a payment — mandatory Class 2 was abolished from April 2024)
- Total tax + NI: £7,132
- Take-home: £32,868
Limited company (£12,570 salary + dividends)
- Salary: £12,570 (at Personal Allowance — no income tax or employee NI; employer NI on £12,570 - £5,000 = £7,570 × 15% = £1,136 but deductible)
- Remaining to draw as dividends: £40,000 - £12,570 salary cost - £1,136 employer NI = £26,294 remaining profit
- Corporation Tax (19%): £26,294 × 19% = £4,996
- Post-tax profit: £21,298 available as dividends
- Dividend income: £21,298 — first £500 free, remainder £20,798 × 10.75% (2026-27 basic dividend rate) = £2,236 dividend tax
- Total taxes paid (employer NI + CT + dividend): ~£8,368
- Take-home equivalent: ~£31,632
At £40,000 the sole trader now comes out ahead by ~£1,236, reflecting the 2024 Class 4 cut to 6%, Class 2 no longer being payable at this profit level, and the 2026-27 dividend rate rise making company extraction more expensive. The administrative overhead of a limited company clearly isn’t worth it at this profit level.
Worked Example: £70,000 Profit
Sole trader
- Income tax on £57,430 above PA: basic rate on £37,700 = £7,540, higher rate on £19,730 = £7,892. Total: £15,432
- Class 4 NI: (£50,270 - £12,570) × 6% = £2,262, (£70,000 - £50,270) × 2% = £395. Total: £2,657
- Class 2: £0 (profits are well above the £7,105 Small Profits Threshold — free NI credit, not a payment)
- Total tax + NI: £18,089
- Take-home: £51,911
Limited company (£12,570 salary + dividends)
- Salary: £12,570. Employer NI on £7,570 = £1,136
- Remaining profit: £70,000 - £12,570 - £1,136 = £56,294
- Corporation Tax: £56,294 is above the £50,000 lower limit, so marginal relief applies rather than a flat 19% — effective CT is £56,294 × 25% − (£250,000 − £56,294) × 3/200 = £11,168
- Post-tax: £45,126 as dividends
- Dividend tax (2026-27 rates): £500 free; £37,700 at 10.75% = £4,053; £6,926 at 35.75% = £2,476. Total: £6,529
- Total taxes: ~£18,833 (CT £11,168 + dividend tax £6,529 + employer NI £1,136)
- Take-home: ~£51,167
At £70,000, the sole trader is still ahead on pure take-home, but only by ~£744 once Corporation Tax marginal relief and the 2026-27 dividend rates are applied correctly — a much narrower gap than a flat-19%-CT estimate would suggest. The company structure carries its overheads without a clear like-for-like advantage at this profit level.
Worked Example: £100,000 Profit
Sole trader
- Income tax: Basic £7,540 + Higher on (£100,000 - £12,570 - £37,700) × 40% = £19,892. Total: £27,432 (at exactly £100,000 the Personal Allowance taper hasn’t started — it only bites on income above £100,000 — but a single extra pound of profit here starts costing an effective 60% marginal rate as the taper kicks in, so £100,000 is the natural stopping point before pension planning becomes worthwhile)
- Class 4 NI: £2,262 + (£100,000 - £50,270) × 2% = £994. Total NI: £3,256
- Class 2: £0 (profits are well above the £7,105 Small Profits Threshold — free NI credit, not a payment)
- Total tax + NI: £30,688
- Take-home: £69,312
Limited company (£12,570 salary + dividends)
- Employer NI: £1,136
- Remaining profit: £86,294
- Corporation Tax (marginal relief zone): £86,294 × 25% − (£250,000 − £86,294) × 3/200 = £19,118
- Post-tax distributable: £67,176
- Dividend tax (2026-27 rates): £500 free; £37,700 at 10.75% = £4,053; £28,976 at 35.75% = £10,359. Total: £14,412
- Total taxes: ~£34,666
- Take-home: ~£65,334
The limited company is worse at £100,000 by roughly £3,978 if you extract every pound as dividends. This is because you are drawing out all profits. The real advantage of a limited company at higher incomes comes from retaining profits inside the company rather than drawing them all out. If you only need £50,000 to live on, leave the rest in the company taxed at 19–25% CT rather than drawing it and paying 35.75%+ dividend tax immediately.
The Retention Strategy: Where Limited Companies Win
The genuine advantage of a limited company at higher profit levels is deferral and control. You pay 19–25% Corporation Tax on profits inside the company. You then draw dividends in future years when your personal income may be lower — retiring early, taking maternity/paternity leave, or simply managing annual income to stay below higher rate thresholds.
| Profit needed personally | Profit retained in company | CT rate | Personal tax deferred |
|---|---|---|---|
| £30,000 from £80,000 profit | £50,000 | 19% | Potentially £17,000+ |
Administration and Costs
| Consideration | Sole Trader | Limited Company |
|---|---|---|
| Annual accounts | Basic (often DIY) | Statutory accounts required |
| Filing obligations | Self Assessment only | HMRC CT return + Companies House confirmation statement |
| Accountant cost | ~£300–£600/year | ~£800–£2,000/year |
| Personal liability | Unlimited | Limited |
| Perceived credibility | Lower (some clients) | Higher (often preferred) |
| IR35 considerations | N/A | Relevant if contracting |
When to Consider a Limited Company
The tipping point varies but a useful rule of thumb is that a limited company becomes meaningfully beneficial when:
- Profits exceed approximately £50,000–£60,000 per year, and
- You do not need to draw all profits personally, or
- You want to separate personal and business liability, or
- Your clients require or prefer to contract with a limited company
Below £40,000–£50,000 in profit, the administrative overhead typically erodes any tax saving. A good accountant can model your specific numbers.
The Bottom Line
Sole trader is simpler, cheaper to administer, and perfectly fine for most freelancers and self-employed people with modest profits. Limited company structures offer the greatest advantage when profits are high enough to retain inside the company at the 19–25% CT rate. Use our self-employment tax calculator to estimate your current sole trader liability, then speak to an accountant about whether incorporation makes sense for your level of income.