- On our 2026/27 sums, a one-person limited company that pays out all its profit costs more tax than being a sole trader at all six profit levels we tested, from £894 more at £20,000 profit to £6,931 more at £150,000.
- The main reason is the dividend tax rise from 6 April 2026: the basic rate went from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%.
- Corporation tax is 19% on profits up to £50,000 and 25% above £250,000, with marginal relief in between; employer National Insurance is 15% on salary above £5,000.
- The gap is smallest at around £60,000 of profit (about £20 on our figures), and a company can only pull ahead if you leave profit in it rather than drawing it all.
- A company also adds fixed costs: £100 to incorporate online, £50 a year for the confirmation statement, payroll, statutory accounts and usually a bigger accountant’s bill.
This page is for anyone trading on their own in England who is weighing up whether to stay a sole trader or run the business through a limited company in the 2026/27 tax year. It works through the tax at six profit levels, line by line, using only rates published by HMRC and GOV.UK.
By the end you will know what each structure costs in tax at your level of profit, why the old rule of thumb (“go limited at £30k–£40k”) no longer holds on these numbers, and which non-tax differences (liability, admin, banking, Making Tax Digital) should weigh in your decision.
These are worked examples on stated assumptions, not a recommendation for your business. Your own figures depend on things we have deliberately left out. Speak to an accountant before you incorporate or change how you pay yourself.
What are the 2026/27 tax rates behind this comparison?
Every rate below was checked on GOV.UK on 19 October 2026 for the tax year 6 April 2026 to 5 April 2027 (and, for corporation tax, the financial year starting 1 April 2026).
| Item | Sole trader | Limited company |
|---|---|---|
| Personal allowance | £12,570 | £12,570 |
| Allowance taper | £1 lost per £2 of income over £100,000 | Same (dividends count as income) |
| Income tax on profit / salary | 20% / 40% / 45% | 20% / 40% / 45% |
| Dividend allowance | n/a | £500 |
| Dividend tax | n/a | 10.75% / 35.75% / 39.35% |
| Class 4 NI | 6% on £12,570–£50,270, 2% above | n/a |
| Class 2 NI | Treated as paid if profits are £7,105 or more | n/a |
| Employee NI | n/a | 8% above £12,570 |
| Employer NI | n/a | 15% above £5,000 |
| Corporation tax | n/a | 19% up to £50,000; 25% above £250,000; marginal relief between (standard fraction 3/200) |
The dividend change came from the Budget on 26 November 2025. The government confirmed the ordinary rate rising from 8.75% to 10.75% and the upper rate from 33.75% to 35.75% from April 2026, with the additional rate left at 39.35%. HMRC’s 2026/27 tables now show those rates. For the detail, see dividend tax rates for 2026/27.
How did we do the sums?
Change any of these assumptions and the answer can move.
- One person, one business You are the only director, the only shareholder and the only employee. You have no other income, no student loan and you live in England.
- Same profit either way “Profit” means takings minus business expenses, before you pay yourself. We assume it is the same whichever structure you use.
- Company pays a £12,570 salary This uses the personal allowance and sits exactly on the employee NI threshold, so no income tax or employee NI is due on it. Employer NI of 15% applies to the £7,570 above £5,000: £1,136 a year.
- No Employment Allowance GOV.UK says a company cannot claim it if its only director is the only employee paid above the secondary threshold. So the £10,500 allowance does not help here.
- Everything else paid out as dividends The company pays corporation tax on what is left, then distributes all of the after-tax profit in the same tax year. Leaving money in the company is covered in a separate section below.
- Tax only No pension contributions, no VAT effects, no associated companies, a 12-month accounting period and no accountant’s fees in the tax figures. Running costs are covered separately.
We also ran every level with a £5,000 salary instead. The £12,570 salary came out ahead at five of the six levels (by £463 to £753 a year), and the £5,000 salary was £211 better only at £150,000, where the personal allowance taper kicks in. Why that happens is explained in the best director salary for 2026/27.
Sole trader vs limited company: how much tax at each profit level?
“Total tax” for the sole trader is income tax plus Class 4 NI. For the company it is employer NI, corporation tax, any income tax on the salary and dividend tax. “Take-home” is what reaches your personal bank account after all of it.
| Profit | Sole trader: total tax | Sole trader: take-home | Ltd: total tax | Ltd: take-home | Difference |
|---|---|---|---|---|---|
| £20,000 | £1,932 | £18,068 | £2,826 | £17,174 | Ltd £894 worse |
| £30,000 | £4,532 | £25,468 | £5,597 | £24,403 | Ltd £1,065 worse |
| £50,000 | £9,732 | £40,268 | £11,139 | £38,861 | Ltd £1,407 worse |
| £75,000 | £20,189 | £54,811 | £21,597 | £53,403 | Ltd £1,408 worse |
| £100,000 | £30,689 | £69,311 | £34,791 | £65,209 | Ltd £4,102 worse |
| £150,000 | £57,960 | £92,040 | £64,891 | £85,109 | Ltd £6,931 worse |
As a share of profit, the sole trader pays 9.7% to 38.6% across the six levels; the company route costs 14.1% to 43.3%.
Extra tax through a limited company, 2026/27
Single director-shareholder, £12,570 salary, all remaining profit paid as dividends
The gap is not a straight line. It narrows between about £50,000 and £65,000 because the sole trader starts paying 40% income tax plus 2% Class 4 on profit above £50,270, while the director is still using the basic-rate band for dividends. In our scan at £1,000 steps, the closest point was £60,000, where the company route was only about £20 behind. Above that, the company moves into marginal relief (an effective 26.5% on profits between £50,000 and £250,000) and the higher dividend rate, and the gap widens again.
What does the worked example look like at £50,000 profit?
Here is the full method for one level, so you can check it or redo it with your own numbers.
Sole trader, £50,000 profit
- Profit
- £50,000
- Less personal allowance
- −£12,570
- Income tax: £37,430 × 20%
- £7,486
- Class 4 NI: (£50,000 − £12,570) × 6%
- £2,246
- Class 2 NI (treated as paid, profit over £7,105)
- £0
Total tax / take-home£9,732 / £40,268
Limited company, £50,000 profit
- Salary (no income tax, no employee NI)
- £12,570
- Employer NI: (£12,570 − £5,000) × 15%
- £1,136
- Taxable company profit: £50,000 − £12,570 − £1,136
- £36,294
- Corporation tax at 19%
- £6,896
- Dividend paid out
- £29,399
- Dividend tax: (£29,399 − £500 allowance) × 10.75%
- £3,107
Total tax / take-home£11,139 / £38,861
Salary and employer NI are deductible for corporation tax, so they come off before the 19% is applied.
Why £150,000 is different: the personal allowance taper
Dividends count towards the £100,000 income limit. At £150,000 of profit the director’s total income is about £116,496, so the personal allowance shrinks and part of the salary becomes taxable.
- Corporation tax: £136,294 × 25% − (£250,000 − £136,294) × 3/200
- £32,368
- Dividend paid out
- £103,926
- Personal allowance: £12,570 − (£116,496 − £100,000) ÷ 2
- £4,322
- Income tax on salary: £8,248 × 20%
- £1,650
- Dividend tax: £28,952 × 10.75% + £74,475 × 35.75%
- £29,737
- Plus employer NI
- £1,136
Total tax / take-home£64,891 / £85,109
Can a limited company still come out ahead?
On these rates, only if you do not need all the profit personally. Money left in the company has paid corporation tax but not yet dividend tax. That is a deferral, not a saving: if you draw it later as dividends, dividend tax is due at whatever rates apply then.
Take £100,000 of profit, the same £12,570 salary, and a dividend of £37,700, which fills the basic-rate band exactly.
- Employer NI
- £1,136
- Corporation tax on £86,294 (with marginal relief)
- £19,118
- Dividend tax: (£37,700 − £500) × 10.75%
- £3,999
- In your pocket: £12,570 + £37,700 − £3,999
- £46,271
- Left in the company after corporation tax
- £29,476
Tax paid this year (vs £30,689 as a sole trader)£24,253
If you can genuinely live on about £46,000 and the business needs cash for equipment, stock or a buffer, that retained profit can be useful. If you would simply draw it next year, most of the apparent saving disappears. How to split salary and dividends year by year is covered in how to pay yourself from a limited company.
Company money is not your money. Taking cash out without it being salary, a properly declared dividend or a recorded loan creates a director’s loan, which has its own tax rules. Dividends can only be paid out of available profits, and each one needs a dividend voucher.
What are the non-tax differences between a sole trader and a limited company?
Liability and privacy
A company is a separate legal entity, so its debts are normally its own rather than yours. In practice, landlords, suppliers and lenders often ask small company directors for a personal guarantee, which puts you back on the hook for that debt. Directors also take on legal duties and can be fined, prosecuted or disqualified for not meeting them. Your name and some details go on the public Companies House register, and identity verification for directors became compulsory from 18 November 2025.
Admin and running costs
| Task | Sole trader | Limited company |
|---|---|---|
| Set-up | Register for Self Assessment, free | Incorporation £100 online |
| Annual filings | Self Assessment return by 31 January | Accounts to Companies House within 9 months of year end; Company Tax Return within 12 months; confirmation statement (£50 online) |
| Paying tax | 31 January, plus payments on account | Corporation tax 9 months and 1 day after the period ends; your own Self Assessment for dividends |
| Payroll | None for yourself | Run PAYE and report to HMRC on or before each payday |
| Accountant | Optional for many | Usually needed for statutory accounts |
Accountants’ fees vary too much by region, bookkeeping quality and transaction volume for a single figure to be meaningful, so we have not put one in the table. As a rule, a limited company costs noticeably more each year because the accountant prepares statutory accounts, the corporation tax return, payroll and your personal return. Get two or three fixed-fee quotes for both structures and add the difference to the tax gap above. Sole traders who pay tax in instalments should also read how payments on account work.
Banking
GOV.UK says a company’s banking must be kept separate from your personal banking, and the simplest way to do that is a business bank account in the company’s name. Sole traders are told they “might be able to use a personal or business bank account”, and to check with their bank.
Most banks’ personal terms rule that out. Monzo’s current account terms say the account is for personal use only and must not be used for business purposes. Starling’s Personal Account General Terms (May 2026) list using the account “for business reasons (including as a sole trader)” as a reason it may stop or limit your card. So in practice both structures end up with a business account. Our guide to business bank accounts for limited companies compares the costs, and the business bank account hub covers sole traders too.
Xero free for 6 months, plus a £200 Amazon gift card after the first paid Xero month (month 7). Provided by Xero.
- Open a qualifying Lloyds Business Account: a new customer (including switchers), or an existing customer opening an account for a new business.
- Buy your first Xero subscription as a new Xero customer through the link Lloyds emails you, by 23:59 on 31 March 2027. The 6 free months cover Simple, Ignite, Grow, Comprehensive and Ultimate.
- Connect the Lloyds account to Xero within 7 months of subscribing.
- For the £200 Amazon gift card, pay the first monthly Xero fee (month 7) on a plan other than Simple, then redeem within 30 days of Xero's email.
Remind me before it ends
Xero free for 6 months, plus a £200 gift card (choice of 10 retailers, such as Amazon or John Lewis) after the first paid Xero month (month 7). Provided by Xero.
- Activate the offer in Santander Online/Mobile Banking under 'Beyond Banking offers' > 'Accounting with Xero', using the account's registered business email.
- Be a new Xero customer and remain one for 7 consecutive months.
- Connect the Santander business bank feed within 7 months.
- Be on a paid Ignite, Grow, Comprehensive or Ultimate plan in month 7. Simple is excluded.
£200 cash 'boost' for new Lloyds business customers who apply online by 30 November 2026, spend £100 on the Visa debit card and set up 2 direct debits by 15 February 2027. Full CASS switchers also qualify.
- Submit an online application for a new Lloyds Business Account between 16 October and 30 November 2026. Saved or incomplete applications don't count.
- By 15 February 2027, spend at least £100 on eligible purchases with the Visa debit card. Cash, transfers, gambling, financial services, crypto and refunds are excluded.
- By 15 February 2027, set up two direct debits from the new account. Direct debits moved by a CASS switch count.
- Lloyds pays £200 into the Business Account by the end of March 2027, and the account must still be open.
Remind me before it ends
Making Tax Digital for Income Tax
MTD for Income Tax applies to sole traders and landlords registered for Self Assessment, not to companies. You are in from 6 April 2026 if your qualifying income in 2024/25 was over £50,000, from April 2027 if it was over £30,000 in 2025/26, and from April 2028 if it is over £20,000 in 2026/27. Qualifying income is gross self-employment and property income, not profit. A director who only takes salary and dividends is outside it, though a company still files its own accounts and tax return. The full timeline is on our Making Tax Digital for Income Tax page.
New business account offers, fee changes and deadlines, in one short email.
When should a sole trader switch to a limited company?
On 2026/27 rates, tax alone is rarely the reason for one person drawing all their profit. The decision is more often driven by the points below. Our break-even guide for going limited goes through the timing in more detail.
- You regularly leave a meaningful share of profit in the business
- Clients or contracts insist on working with a company
- Your work carries real risk of business debts you want kept separate
- You plan to bring in other shareholders or investors
- You are close to the £60,000 range where the tax gap is narrowest and other factors tip it
- You need all the profit to live on
- Your profit is under about £50,000, where the company costs more tax and more admin
- You want the lowest fixed costs and simplest paperwork
- You value privacy about your business finances
- Your profit swings a lot from year to year
Scottish income tax bands, student loans, a spouse or partner as shareholder, employer pension contributions, IR35, losses, capital allowances and VAT can all change the result. We have not modelled pensions; take regulated advice on those. Also note that from April 2027 the order in which the personal allowance is set against income changes, so the 2027/28 sums will need redoing.
Related guides: sole trader expenses HMRC accepts, the VAT threshold (same for both structures), registering as a sole trader and the £1,000 trading allowance.
FAQ
Is a limited company more tax efficient than a sole trader in 2026/27?
Not if you are the only director and shareholder and you draw out all the profit. On our sums the company route costs more tax at every level from £20,000 to £150,000, mainly because of the higher dividend rates from April 2026 and 15% employer NI. It can only come out ahead if you leave profit in the company.
What were the dividend tax changes from April 2026?
The basic (ordinary) dividend rate rose from 8.75% to 10.75% and the higher (upper) rate from 33.75% to 35.75%. The additional rate stayed at 39.35% and the dividend allowance stayed at £500. The changes were announced in the Budget on 26 November 2025.
Can a one-person company claim Employment Allowance?
No. GOV.UK says you cannot claim if your company has just one director and that director is the only employee liable for employer (secondary) Class 1 National Insurance. The allowance is worth up to £10,500 in 2026/27 for eligible employers.
Do sole traders still pay Class 2 National Insurance?
Not if profits are £7,105 or more: Class 2 is treated as paid, which protects your National Insurance record. Below that, you can choose to pay voluntary Class 2 at £3.65 a week in 2026/27. Class 4 is 6% on profits between £12,570 and £50,270 and 2% above.
What corporation tax will my company pay?
19% if taxable profits are £50,000 or less, 25% if they are over £250,000, and the main rate reduced by marginal relief in between. The limits are reduced for short accounting periods and shared if you have associated companies. Salary and employer NI are deducted before corporation tax is worked out.
Does Making Tax Digital apply to limited companies?
MTD for Income Tax applies to sole traders and landlords, not to companies. A director paid only by salary and dividends is not brought in by it. Sole traders join based on gross income: over £50,000 from April 2026, over £30,000 from April 2027 and over £20,000 from April 2028.
Do I need a business bank account as a sole trader?
The law does not require one, and GOV.UK says you might be able to use a personal or business account. But many personal account terms forbid business use, including Monzo’s and Starling’s. A limited company must keep its banking separate from yours.
Sources
- GOV.UK: Income Tax rates and Personal Allowances (2026/27 bands and £100,000 taper)
- HMRC: Income Tax rates and allowances for current and previous tax years (dividend rates and allowance by year)
- GOV.UK: Tax on dividends (2026/27 rates; Self Assessment above £10,000)
- GOV.UK: Changes to tax rates for property, savings and dividend income (26 November 2025)
- GOV.UK: Self-employed National Insurance rates (Class 2 and Class 4, 2026/27)
- HMRC: Rates and thresholds for employers 2026 to 2027 (NI thresholds, 15% employer rate, Employment Allowance £10,500)
- GOV.UK: Employment Allowance (single-director exclusion)
- HMRC: Corporation Tax rates and allowances (19%, 25%, limits and 3/200 standard fraction)
- HMRC: Marginal Relief for Corporation Tax
- Companies House: fees (incorporation £100, confirmation statement £50 online)
- Companies House: fees changing from 1 February 2026 (also identity verification from 18 November 2025)
- GOV.UK: Running a limited company (director duties, separate banking, dividends)
- GOV.UK: Prepare and file annual accounts (filing and payment deadlines)
- GOV.UK: Business records if you’re self-employed (personal or business account)
- HMRC: Find out if and when you need to use Making Tax Digital for Income Tax
- Monzo: personal current account terms and conditions
- Starling Bank: Personal Account General Terms (May 2026)
Checked on 19 October 2026 against HMRC, GOV.UK and Companies House guidance and the banks’ published terms. Tax rates and terms change; the official documents always prevail.