Do limited companies pay less tax than sole traders?

At higher profit levels (roughly £40,000+), limited companies typically pay less tax through the salary plus dividends strategy. At lower profits, the admin costs and accounting fees often outweigh the tax savings, making sole trader better.

At what profit should I switch from sole trader to limited company?

Historically the crossover point was around £40,000-£50,000 annual profit, but the April 2025 rise in employer NI (to 15%) and the April 2026 rise in dividend tax rates (to 10.75%/35.75%) have narrowed — and in some cases eliminated — the limited company tax advantage even at higher profit levels. Model your own numbers or speak to an accountant rather than relying on a fixed crossover figure. Factor in £1,500-£2,000 annual accounting costs for a limited company.

What are the main tax differences between sole trader and limited company?

Sole traders pay income tax and Class 2/4 NI on all profits. Limited companies pay Corporation Tax on profits, then you pay income tax on salary and dividend tax on dividends. The dividend tax rates are lower than income tax, creating the saving.

Is it worth having a limited company for tax purposes?

The pure tax saving has narrowed considerably since April 2026 (higher employer NI and higher dividend tax rates), and at many profit levels sole trader and limited company now come out close to level on tax alone. A limited company can still be worth it for liability protection, professional image, or retaining profits in the business — but don't assume it automatically saves tax. Model your own numbers or speak to an accountant.

Ltd Company vs Sole Trader for Tax — Full Comparison UK 2026 | PocketWise

If you are deciding whether to incorporate, how to pay yourself, and how to stay compliant as a director, start with the Limited Company Hub.

Sole trader or limited company? Tax is a major factor in this decision. Here’s a detailed comparison.

Read more: See our Sole Trader guide for a complete overview of this topic.

Quick Comparison

Factor	Sole Trader	Limited Company
Tax on profits	Income tax + NI	Corporation Tax
How you get paid	Draw from business	Salary + dividends
Top tax rate	45% + NI	~25% CT + dividend tax
Admin	Simple	More complex
Accounting costs	£200-500/year	£1,500-3,000/year
Legal liability	Personal (unlimited)	Limited to company

Sole Trader Taxation

How It Works

All business profits are taxed as your personal income.

Component	Calculation
Profit	Income minus expenses
Income tax	Based on tax bands
Class 2 NI	£3.65/week (voluntary, 2026/27)
Class 4 NI	6% / 2% on profits

Sole Trader Tax Rates (2026/27)

Profit Band	Income Tax	Class 4 NI	Combined
Up to £12,570	0%	0%	0%
£12,571-£50,270	20%	6%	26%
£50,271-£125,140	40%	2%	42%
Over £125,140	45%	2%	47%

Sole Trader Tax Example: £50,000 Profit

Component	Calculation	Tax
Personal allowance	£12,570	£0
Basic rate (£12,571-£50,000)	£37,430 × 20%	£7,486
Class 2 NI	52 weeks × £3.65 (voluntary)	£190
Class 4 NI	£37,430 × 6%	£2,246
Total tax		£9,922

Take-home: ~£40,078

Limited Company Taxation

How It Works

Company pays Corporation Tax. You extract money via salary and dividends.

Step	Tax
Company profits	Corporation Tax (19-25%)
Your salary	Income tax + NI
Your dividends	Dividend tax (no NI)

Corporation Tax Rates (2026/27)

Profit	Rate
Under £50,000	19%
£50,000-£250,000	26.5% effective (marginal relief)
Over £250,000	25%

Dividend Tax Rates

Band	Dividend Rate
Dividend allowance	£500 tax-free
Basic rate band	10.75% (rose from 8.75% on 6 April 2026)
Higher rate band	35.75% (rose from 33.75% on 6 April 2026)
Additional rate band	39.35%

Limited Company Tax Example: £50,000 Profit

Strategy: £12,570 salary + rest as dividends

Component	Calculation	Amount
Company Level
Profit before salary	£50,000
Salary paid	-£12,570
Employer NI (15% above £5,000)	-£1,136
Taxable profit	£36,294
Corporation Tax (19%)		£6,896
Profit after CT		£29,398

Personal Level
Salary tax	£0 (within allowance)
Dividend (£29,398)
Less dividend allowance	-£500
Taxable dividend	£28,898
Dividend tax (10.75%)		£3,107

Total Tax
Corporation Tax		£6,896
Employer NI		£1,136
Dividend tax		£3,107
Total		£11,139

Take-home: ~£38,861

Side-by-Side Comparison at Different Profit Levels

£30,000 Profit

	Sole Trader	Limited Company	Difference
Tax paid	~£4,722	~£5,597	Ltd pays ~£875 more
Take-home	~£25,278	~£24,403
Accounting costs	~£300	~£1,500
Net benefit			Sole trader wins

£50,000 Profit

	Sole Trader	Limited Company	Difference
Tax paid	~£9,922	~£11,139	Sole trader pays ~£1,217 less
Take-home	~£40,078	~£38,861
Accounting costs	~£400	~£1,800
Net benefit			Sole trader wins — the Class 4 NI cut to 6% plus the 2026 rises in employer NI and dividend tax have removed the Ltd tax edge at this profit level

£80,000 Profit

	Sole Trader	Limited Company	Difference
Tax paid	~£22,479	~£24,110	Sole trader pays ~£1,631 less
Take-home	~£57,521	~£55,890
Accounting costs	~£500	~£2,000
Net benefit			Sole trader wins — the 2026 dividend tax rise and 15% employer NI have largely closed the historic Ltd company gap

£100,000 Profit

	Sole Trader	Limited Company	Difference
Tax paid	~£30,879	~£34,666	Sole trader pays ~£3,787 less
Take-home	~£69,121	~£65,334
Accounting costs	~£500	~£2,500
Net benefit			Sole trader wins — check your own numbers, as the 2024-26 Class 4 NI cut and 2025-26 employer NI/dividend tax rises have removed most of the historic Ltd advantage even at this profit level

When Sole Trader Wins

Situation	Why Sole Trader
Profit under £40,000	Tax similar, less admin
Value simplicity	Much easier to manage
Variable income	Flexibility easier
Side hustle	Not worth the complexity
Don’t want company admin	No filings, simpler accounts

When Limited Company Wins

Situation	Why Ltd
Profit over £50,000	Pure tax savings have largely disappeared since the 2026 dividend tax rise and 6% Class 4 NI rate — model your own numbers; non-tax factors (liability, image) now matter more
Want liability protection	Company is separate legal entity
Planning to grow	More professional structure
Bringing in investors	Easier to sell shares
Multiple owners	Better profit sharing

Additional Considerations

Accounting Costs

Structure	Typical Annual Cost
Sole trader (DIY)	£0-100
Sole trader (accountant)	£200-500
Limited company	£1,500-3,000

Factor this into your comparison.

Pension Contributions

Structure	Pension Treatment
Sole trader	Personal contributions, income tax relief
Limited company	Company contributions, CT deduction + no NI

Company pension contributions can be very tax-efficient.

Retained Profits

Structure	Keeping Money in Business
Sole trader	All profit taxed whether taken or not
Limited company	Only CT on profit; take when needed

If you don’t need all profits immediately, Ltd lets you defer personal tax.

Dividend Rules

Requirement	Details
Must have profit	Can’t pay dividends without retained profit
Board meeting	Must declare properly
Dividend voucher	Documentation required
Same % per share	Can’t be selective

IR35 Warning

If you’re a contractor and would be “employed” without your company:

IR35 Status	Tax Treatment
Inside IR35	Taxed like employment — no Ltd benefit
Outside IR35	Full salary + dividend benefits

Check IR35 status before assuming Ltd saves tax.

Making the Switch

Sole Trader to Limited Company

Step	Action
1	Register company at Companies House
2	Open business bank account
3	Register for Corporation Tax
4	Set up payroll (for salary)
5	Transfer business assets
6	Continue sole trader SA for transition year

Consider Professional Advice

Reason	Value
Correct timing	Avoid double taxation
Asset transfer	May have CGT implications
VAT registration	May trigger if not already VAT registered
Future planning	Structure for your goals

Summary: Decision Guide

Your Profit	Recommendation
Under £30,000	Sole trader
£30,000-£40,000	Probably sole trader
£40,000-£50,000	Borderline — consider other factors
£50,000-£70,000	Sole trader is often now cheaper on tax alone; model both scenarios
Over £70,000	Ltd’s historic tax edge has narrowed sharply — check your own numbers rather than assuming Ltd wins

Other factors that push towards Ltd:

Need liability protection
Want to retain profits in business
Planning to bring in partners/investors
Professional image important

Other factors that push towards sole trader:

Value simplicity
Income varies significantly
Don’t want accounting overhead
Side business alongside employment

Ltd Company vs Sole Trader for Tax — Full Comparison UK 2026

Contents

Quick Comparison

Sole Trader Taxation

How It Works

Sole Trader Tax Rates (2026/27)

Sole Trader Tax Example: £50,000 Profit

Limited Company Taxation

How It Works

Corporation Tax Rates (2026/27)

Dividend Tax Rates

Limited Company Tax Example: £50,000 Profit

Side-by-Side Comparison at Different Profit Levels

£30,000 Profit

£50,000 Profit

£80,000 Profit

£100,000 Profit

When Sole Trader Wins

When Limited Company Wins

Additional Considerations

Accounting Costs

Pension Contributions

Retained Profits

Dividend Rules

IR35 Warning

Making the Switch

Sole Trader to Limited Company

Consider Professional Advice

Summary: Decision Guide

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