Sole trader vs limited company 2026/27: which pays less tax?
An honest comparison for UK business owners, with real numbers for the 2026/27 tax year.
The short answer: In 2026/27, if you take all of your profit out, a sole trader and a limited company director end up with almost the same take-home pay. A limited company pulls ahead when you do not need all the profit straight away, when you want to pay into a pension, or when you want limited liability and a more established image.
Choosing between working as a sole trader and setting up a limited company is one of the biggest decisions you make when you start or grow a business. The tax rules changed in April 2026, when dividend tax went up by two percentage points, so older advice that a limited company always saves tax is no longer true. Here is how the two compare today.
How each structure is taxed
Sole trader
- You pay Income Tax on all of your profit: 0% up to £12,570, 20% up to £50,270, 40% above that and 45% above £125,140.
- You pay Class 4 National Insurance: 6% on profit between £12,570 and £50,270 and 2% above that.
- You are taxed on the profit whether you take the money out or leave it in the business.
Limited company
- The company pays Corporation Tax on its profit: 19% up to £50,000, rising to 25% above £250,000.
- You usually take a small salary and the rest as dividends. Dividends are taxed at 10.75%, 35.75% or 39.35%, after a £500 tax-free allowance.
- You only pay personal tax on what you take out. Profit left in the company has only paid Corporation Tax.
Take-home pay compared for 2026/27
The table shows how much you keep if you take all of the profit out. The limited company figures assume a sole director with no other employees, a salary of £12,570 and the rest paid as dividends.
| Profit | Sole trader | Limited company |
|---|---|---|
| £30,000 | £25,468 | £24,403 |
| £60,000 | £46,111 | £46,091 |
| £100,000 | £69,311 | £65,210 |
At £30,000 a sole trader keeps about £1,000 more. At £60,000 the two are almost identical. At £100,000 a sole trader keeps more if every pound is taken out, because dividends above £50,270 are taxed at 35.75%. Figures are rounded to the nearest pound and assume no other income.
Where a limited company wins: leaving profit in the business
Most business owners with higher profits do not need to take everything out every year. This is where a limited company makes a real difference.
Take a business making £100,000 profit where the owner needs about £46,000 a year to live on. As a sole trader, they pay about £30,700 in Income Tax and National Insurance on the full £100,000. As a limited company director taking a £12,570 salary and dividends up to the basic rate limit, the total tax paid this year is about £24,250, and around £29,500 stays in the company for the future. That is roughly £6,400 less tax this year.
The money left in the company can be used to grow the business, paid into your pension with no Income Tax or National Insurance, or taken out in a later year when your other income is lower.
Beyond tax: other differences that matter
- Limited liability. A company is a separate legal entity, so your personal assets are usually protected if the business runs into debt. As a sole trader, you and the business are the same.
- Image and contracts. Some clients and agencies only work with limited companies.
- Making Tax Digital. Sole traders with income over £50,000 must keep digital records and send quarterly updates to HMRC from April 2026, and those over £30,000 from April 2027. Limited companies are not part of Making Tax Digital for Income Tax.
- Paperwork and cost. A company files annual accounts and a confirmation statement with Companies House, a Corporation Tax return with HMRC, and usually runs a payroll. Accountancy fees are higher than for a sole trader.
- Privacy. Company details and directors appear on the public Companies House register, and directors must verify their identity.
- Mortgages and loans. Lenders usually ask for two years of accounts either way, but some find a limited company with retained profit easier to assess.
When should you switch to a limited company?
There is no single profit figure where a limited company becomes better. It is usually worth considering when your profit is consistently higher than what you need to live on, when you want to make large pension contributions, when clients ask you to work through a company, or when you want to protect your personal assets.
You can start as a sole trader and move to a limited company later. Moving your business into a company needs some planning, for example around equipment, contracts, your bank account and telling HMRC, but it is a routine process.
Not sure which structure is right for you?
We will compare both options using your own figures and, if a limited company makes sense, set it up and register it with HMRC for you.
Book a free strategy callFrequently asked questions
Is a limited company always more tax-efficient than being a sole trader?
No. Since dividend tax rose in April 2026, a sole trader and a limited company director who take all of their profit out pay almost the same tax. A limited company saves tax mainly when you leave profit in the business or pay into a pension through the company.
At what profit should I set up a limited company?
There is no fixed figure. It depends on how much you need to take out each year, your pension plans, your other income and whether you want limited liability. For many people it becomes worth considering once profit is regularly above £50,000 and they do not need all of it.
Can I switch from sole trader to limited company?
Yes. You set up the company, move your business into it and tell HMRC you have stopped trading as a sole trader. You file a final Self Assessment return for your self-employment.
Do limited companies have to use Making Tax Digital for Income Tax?
No. Making Tax Digital for Income Tax applies to sole traders and landlords. Limited companies keep filing Corporation Tax returns as before.
Is a limited company more expensive to run?
Usually, yes. There are more filings, including annual accounts, a confirmation statement and a Corporation Tax return, and often a payroll, so accountancy fees are higher. For many owners the tax planning options and limited liability are worth the extra cost.
Related guides
- Salary vs dividends 2026/27: how to pay yourself tax-efficiently
- Director's loan account explained: s455 tax and the rules for 2026/27
- Corporation Tax rates 2026/27: 19%, 25% and marginal relief
This guide is general information for the 2026/27 tax year in England, Wales and Northern Ireland and is not personal tax advice. Income Tax rates are different in Scotland. The right structure depends on your profit, plans and circumstances, so speak to an accountant before you decide.
