- Sole trader
- an individual who runs an unincorporated business and pays income tax and Class 4 National Insurance on the whole profit.
- Limited company
- a separate legal entity that pays corporation tax on its profit, after which the director takes money out as salary and dividends.
- Salary and dividend split
- the common limited company strategy of taking a small salary plus dividends to lower the total tax and National Insurance bill.
- Dividend allowance
- the £500 of dividends taxed at 0% each year before the 10.75%, 35.75% or 39.35% dividend rates apply.
- Corporation tax
- the 19% to 25% tax a limited company pays on profit before any dividends are taken.
Key facts
- Sole trader £30,000 profit: take-home £25,468
- Limited company £30,000 profit: take-home £24,403
- Sole trader £50,000 profit: take-home £40,268 (+£1,406 vs limited company)
- Sole trader £100,000 profit: take-home £69,311 (+£4,102 vs limited company)
- Limited company model: £12,570 salary plus dividends at 10.75% basic rate
Model assumptions for 2026/27
- One person, this is their only income, England, Wales or Northern Ireland, full personal allowance £12,570, all profit extracted in the year.
- Sole trader: take-home = profit minus income tax minus Class 4 National Insurance. Income tax 20% from £12,570 to £50,270 then 40%. Class 4 NI 6% from £12,570 to £50,270 then 2%. Class 2 is no longer charged.
- Limited company, optimal route: director salary £12,570, which uses the full personal allowance and is corporation tax deductible. A sole director cannot claim the Employment Allowance, so employer National Insurance of 15% is due on the £7,570 above the £5,000 secondary threshold, which is £1,135.50. Corporation tax at 19% up to £50,000 of company profit, with marginal relief above, on profit after salary and employer NI. The rest is taken as dividends, £500 tax-free then 10.75% in the basic band and 35.75% in the higher band.
Dividend tax rates rose by 2 percentage points in 2026/27. See the detail at dividend tax rates 2026/27 and the company tax at corporation tax rates 2026/27, and note that paying a salary also brings in employer National Insurance, covered at employer National Insurance 2026/27.
Model your own numbers with the Corporation Tax Calculator and the Income Tax Calculator, or read our salary vs dividends guide for how directors choose the split.
The core differences
| Feature | Sole trader | Limited company |
|---|---|---|
| Legal status | You are the business | The company is a separate legal entity |
| Personal liability | Unlimited: personal assets at risk | Limited to shares held |
| Tax on profits | Income tax (20% to 45%) + Class 4 NI | Corporation tax (19% to 25%) |
| Income tax on salary | Only if you pay yourself above £12,570 | Only if you pay yourself above £12,570 |
| Dividend tax | Not applicable | 10.75% to 39.35% |
| Self-assessment | Annual return | Annual return + statutory accounts + CT600 |
| Companies House | Not required | Must file annual accounts + confirmation statement |
| Typical accountancy cost | £300 to £800/year | £1,000 to £2,500/year |
Take-home comparison: 2026/27
| Profit | Sole trader take-home | Limited company take-home | Advantage |
|---|---|---|---|
| £30,000 | £25,468 | £24,403 | Sole trader better by £1,065 |
| £50,000 | £40,268 | £38,862 | Sole trader better by £1,406 |
| £75,000 | £54,811 | £53,404 | Sole trader better by £1,408 |
| £100,000 | £69,311 | £65,210 | Sole trader better by £4,102 |
Take-home after all taxes and National Insurance, rounded to the pound. Limited company uses £12,570 salary plus dividends.
Limited Company Tax Calculator
Model your specific profit level to compare sole trader vs limited company.
Beyond tax: the other reasons to incorporate
Limited liability: As a sole trader, your personal assets (home, savings) are at risk if the business fails or faces a lawsuit. A limited company limits your personal liability to the value of your shares (typically £1). For businesses carrying professional risk (consultancy, construction, technology), this is an important consideration.
Credibility and contracts: Some clients, especially large corporations and government bodies, prefer or require contractors to operate through a limited company. The reputational signal of a registered company can be meaningful in certain sectors.
Pension efficiency: A limited company can make employer pension contributions directly, which are fully deductible against corporation tax. A sole trader's pension contributions reduce income tax but not NI. The limited company structure makes large pension contributions considerably more tax-efficient.
Leaving profits in the company: A limited company allows you to retain profits within the company and draw them as dividends in future years when your personal income may be lower. This flexibility to time income extraction is a significant planning tool.
Expert Tip
The tax saving calculations above assume you extract all profits from the company as salary and dividends each year. If you leave profits in the company (for example, to invest in the business, buy equipment, or hold as reserves), the corporation tax rate is 19%, and you delay income tax and dividend tax until you extract the funds. Over several years, this can compound into a material financial advantage.Official sources
Related Calculators
Frequently Asked Questions
For a sole director taking all the profit out, no. On these 2026/27 figures the sole trader keeps more at every level, from £1,065 more at £30,000 of profit to £4,102 more at £100,000. The case for a company is now non-tax, such as limited liability and retaining profit.
Class 4 National Insurance for the self employed is only 6%, while company profit is taxed at 19% corporation tax and the money taken out as dividends is then taxed at 10.75% or more. The dividend rate rose by 2 percentage points in April 2026, which tipped the balance toward the sole trader.
On £50,000 of profit for 2026/27 a sole trader keeps about £40,268 after income tax and Class 4 National Insurance, while a limited company keeps about £38,862 after corporation tax and dividend tax on a £12,570 salary plus dividends, so the sole trader is about £1,406 ahead.
It makes the company slightly worse, not better, because less profit is removed before corporation tax. The £12,570 salary is the better company route here, and even with it the sole trader still wins at every level.
When you do not need all the profit and can leave some in the company, when limited liability matters, when you can split shares with a spouse, when you want larger employer pension contributions, or when you employ someone else and can claim the £10,500 Employment Allowance.
No. Scottish income tax bands differ, which changes the sole trader figures and the salary part of the company route, though dividend tax rates are the same across the UK. Use the calculators for Scottish numbers.
No, they are tax and National Insurance only. A limited company also carries higher accountancy and filing costs, which widens the gap in favour of the sole trader for someone taking all their profit.
Yes, but the switch creates two tax periods in one year: sole trader profits to the date of incorporation, then company profits after. You must register the company with Companies House, notify HMRC, and often close the sole trader record. Professional advice is worth taking before transferring assets or contracts.
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James Hartley is a Chartered Management Accountant (CIMA) with more than eight years of experience in UK tax, payroll and compliance. He holds a BSc in Finance and Economics from the University of Manchester and spent his early career at a Big 4 accounting firm. He founded WhatsUK to build free UK financial calculators and guides verified against official HMRC sources. He authors every calculator and article on WhatsUK.
Sources & Official References
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Disclaimer: This calculator provides estimates based on standard HMRC rates for 2026/27. Results may vary based on individual circumstances. This is not financial advice. Always consult a qualified accountant or CIMA-qualified financial adviser for personal tax matters.