Sole trader vs limited company: the 2026/27 tax comparison

Sole trader vs limited company: the 2026/27 tax comparison


 

The question every growing business asks

At some point every sole trader looks at the tax bill and wonders whether incorporating would leave more money in their pocket. The honest answer is that it depends on profit levels, how much you need to draw, and how much admin you are willing to carry. The 2026/27 tax year is a useful moment to run the numbers, because the main thresholds remain frozen, so the comparison below rests on settled rates. Always confirm the current figures at gov.uk before acting, since Budgets can move them.

How a sole trader is taxed in 2026/27

A sole trader pays income tax on the full profit of the business, whether the money is drawn or left in the business. The personal allowance is £12,570, the basic rate of 20% applies up to £50,270, the higher rate of 40% runs to £125,140, and the additional rate of 45% applies above that. On top of income tax comes Class 4 National Insurance: 6% on profits between £12,570 and £50,270, and 2% above £50,270. Class 2 National Insurance no longer applies to most sole traders, a simplification introduced in April 2024.

The structure is simple and cheap to run: one Self Assessment return, no separate company accounts, no payroll. The price of that simplicity is that every pound of profit is taxed in the year it is earned, and there is no legal separation between you and the business.

How a limited company is taxed in 2026/27

A company pays corporation tax on its profits: 19% on profits up to £50,000, 25% on profits above £250,000, with marginal relief smoothing the band in between. Taking money out is a second, separate tax event. Salary is deductible for the company but taxed through PAYE; dividends come from after-tax profits and are taxed in the shareholder's hands at 8.75% within the basic rate band, 33.75% at the higher rate and 39.15% at the additional rate, with the first £500 of dividends tax-free each year.

The company route brings admin: statutory accounts, a corporation tax return, a confirmation statement, and usually payroll. It also brings limited liability, which for many owners matters more than the tax.

A worked comparison at £60,000 profit

Take £60,000 of profit before the owner's pay, and compare like with like.

As a sole trader, income tax comes to roughly £11,430 and Class 4 National Insurance to roughly £2,460, for a combined bill of about £13,890. There is nothing more to pay and nothing left untaxed.

Through a limited company, the common approach is a salary at the £12,570 personal allowance with the balance taken as dividends. The salary and its employer National Insurance reduce taxable profit, corporation tax at 19% applies to what remains, and dividend tax at 8.75% applies to the dividends drawn. The combined bill lands around £13,100 to £13,300, depending on the exact salary chosen. The saving at £60,000 is modest, a few hundred pounds, and much of it can be absorbed by accountancy fees.

The gap widens as profits rise. At £100,000 of profit, the company route typically saves several thousand pounds a year, because retained profits suffer only corporation tax until they are drawn, and dividends remain cheaper than the combined income tax and National Insurance on the same income as a sole trader.

Beyond tax: the factors that often decide it

Tax is only half the decision. Limited liability protects personal assets if the business fails, which matters in sectors with significant contractual or debt exposure. A limited company often looks more credible to larger clients and lenders, and it makes bringing in partners, investors or a future sale far simpler. Pension contributions paid by the company are usually more tax-efficient than personal contributions, and profits can be retained in the company for reinvestment at corporation tax rates.

Against that, weigh the admin burden and cost, the discipline of keeping company money strictly separate, and the need for distributable profits before dividends can legally be paid. Contractors should also weigh their IR35 status position before restructuring purely for tax reasons.

A rough rule of thumb

Below around £30,000 to £40,000 of profit, the simplicity and low cost of sole trader status usually wins. Above that, the limited company normally pulls ahead on tax, and the advantage grows with profit. Between the two sits a grey zone where personal circumstances, risk appetite and growth plans matter more than the spreadsheet.

Structure decisions are hard to unwind cheaply, so get proper advice before you incorporate or disincorporate. Finex Outsourcing is a Global Business Services provider whose tax compliance services help UK business owners model both routes and stay compliant whichever they choose. If you are starting out as a sole trader, the registration steps are at gov.uk.



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