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

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

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	£3.45/week
Class 4 NI	9% / 2% on profits

Sole Trader Tax Rates (2025/26)

Profit Band	Income Tax	Class 4 NI	Combined
Up to £12,570	0%	0%	0%
£12,571-£50,270	20%	9%	29%
£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 × £3.45	£179
Class 4 NI	£37,430 × 9%	£3,369
Total tax		£11,034

Take-home: ~£38,966

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 (2025/26)

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	8.75%
Higher rate band	33.75%
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 (~£478)	-£478
Taxable profit	£36,952
Corporation Tax (19%)		£7,021
Profit after CT		£29,931
Personal Level
Salary tax	£0 (within allowance)
Dividend (£29,931)
Less dividend allowance	-£500
Taxable dividend	£29,431
Dividend tax (8.75%)		£2,575
Total Tax
Corporation Tax		£7,021
Employer NI		£478
Dividend tax		£2,575
Total		£10,074

Take-home: ~£39,926

Side-by-Side Comparison at Different Profit Levels

£30,000 Profit

	Sole Trader	Limited Company	Difference
Tax paid	~£4,988	~£5,150	Ltd pays ~£162 more
Take-home	~£25,012	~£24,850
Accounting costs	~£300	~£1,500
Net benefit			Sole trader wins

£50,000 Profit

	Sole Trader	Limited Company	Difference
Tax paid	~£11,034	~£10,074	Ltd saves ~£960
Take-home	~£38,966	~£39,926
Accounting costs	~£400	~£1,800
Net benefit			Marginal — consider other factors

£80,000 Profit

	Sole Trader	Limited Company	Difference
Tax paid	~£24,054	~£19,500	Ltd saves ~£4,554
Take-home	~£55,946	~£60,500
Accounting costs	~£500	~£2,000
Net benefit			Ltd company wins (~£3,054)

£100,000 Profit

	Sole Trader	Limited Company	Difference
Tax paid	~£34,054	~£26,000	Ltd saves ~£8,054
Take-home	~£65,946	~£74,000
Accounting costs	~£500	~£2,500
Net benefit			Ltd company wins (~£5,554)

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	Meaningful tax savings
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	Limited company likely better
Over £70,000	Limited company

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