It’s one of the first questions almost everyone asks when they start trading, and one of the most persistently badly-answered ones online. Partly because the honest answer is “it depends on your numbers,” and partly because a lot of what’s written about sole trader vs limited company hasn’t caught up with recent changes. Dividend tax rates went up in April 2026, for instance, which nudges the comparison slightly back in the sole trader’s favour compared to older articles you might have read. Here’s where things stand for the 2026/27 tax year.
The core trade-off: simplicity vs structure
A sole trader is you, trading in your own name (or a trading name). There’s no legal separation between you and the business. A limited company is a separate legal entity that you own and usually direct; the company trades, not you personally.
That distinction drives almost everything else. On liability: as a sole trader, you have unlimited personal liability. If the business can’t pay its debts, your personal assets are, in principle, on the line. A limited company gives you limited liability, capped at what you’ve invested or guaranteed.
On admin: a sole trader files one Self Assessment return a year. A limited company has three separate annual obligations: a Company Tax Return (CT600), statutory annual accounts filed at Companies House, and a confirmation statement. And if you take a salary, you as director still personally file Self Assessment for your salary and dividend income on top of all that.
And on tax, it’s genuinely numbers-dependent, so let’s go through it properly.
How the tax compares, 2026/27
As a sole trader, your profits are taxed as personal income:
| Band | Profit range | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571–£50,270 | 20% |
| Higher rate | £50,271–£125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
On National Insurance, Class 2 is no longer something most people actually pay: if your profits are at or above £7,105, you get your qualifying year credited automatically at no cost, and it’s only payable voluntarily (£3.65/week) if you’re below that and want to protect your State Pension record. Class 4 is charged at 6% on profits between £12,570 and £50,270, and 2% above that.
As a limited company, the company pays Corporation Tax on its profits first, and then you’re taxed personally on however you extract money from it, typically a mix of a small salary and dividends. Corporation Tax runs at 19% on profits up to £50,000 (the “small profits rate”), 25% above £250,000 (the “main rate”), with marginal relief tapering the effective rate in between using a 3/200 fraction.
Dividends are where the recent change matters most. The first £500 a year is tax-free (the dividend allowance). Above that, dividend tax is 10.75% at basic rate, 35.75% at higher rate, and 39.35% at additional rate. Worth flagging clearly: the basic and higher rates rose by 2 percentage points from April 2026, so if you’ve seen 8.75%/33.75% quoted anywhere, that’s now out of date.
If you pay yourself a salary through PAYE, the company pays employer’s National Insurance at 15% above a £5,000 secondary threshold, and you pay employee NI at 8% (dropping to 2% above £967/week). There’s an Employment Allowance of £10,500 that can offset employer NI, but a company where the sole director is also the only employee earning above the threshold can’t claim it. It only becomes available once there’s a second employee or director earning above the threshold too.
Put simply: incorporating doesn’t avoid tax, it restructures how and when it’s charged. Whether that restructuring saves money depends heavily on your profit level, how much you need to draw out of the business to live on, and whether you’d rather leave surplus profit inside the company (taxed once, at Corporation Tax rates, until you draw it out) or take it all as income now.
Why “just incorporate at £X profit” is bad advice
You’ll see rules of thumb online, commonly somewhere in the £30,000–£50,000 annual profit range, suggesting that’s roughly where a limited company starts to come out ahead. Treat that as a rough starting point for a conversation, not a fact. It isn’t a figure HMRC publishes anywhere; it moves depending on how much of the profit you actually need to draw out to live on and what other income you have, and it’s now shifted again by April 2026’s dividend rate rise. Two people with identical turnover can get different answers depending on personal circumstances alone.
Beyond tax: things worth weighing that aren’t about numbers
Credibility and perception matter to some clients, particularly larger businesses, who prefer to contract with a limited company, though this varies a lot by industry. A limited company can also issue shares, so it can bring in investors or co-owners; a sole trader structure can’t accommodate that at all. Exit planning differs too: selling a limited company (or shares in it) is a different, often more tax-efficient process than selling a sole trader business’s assets. And ongoing cost is real: limited company accounts and returns typically cost more to prepare than a sole trader’s Self Assessment, simply because there’s more to file.
Our take
We don’t think there’s a universal right answer here, and we’re wary of anyone who gives you one without looking at your actual numbers. What we do instead is run the comparison properly for your specific profit level, drawings needs, and plans. See our business support service for company formation and structuring advice, and our tax service for how we handle either structure’s returns once you’ve decided.
If you’re currently trading as a sole trader and wondering whether 2026/27 is the year to incorporate, or the reverse, wondering if company life is more admin than it’s worth, get in touch and we’ll talk it through against your actual figures, not a generic rule of thumb.
Last reviewed: 19 August 2026. This is general guidance, not personalised advice. Rules and figures may have changed since publication, so please check with us before acting on it.
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