Sole trader or limited company? The 2026 to 2027 tax comparison

In the three worked examples below, a one-person business pays less tax as a sole trader than through a limited company that pays all its profit out, under the 2026 to 2027 rules. The examples use profits of £30,000, £50,000 and £80,000 and the rates GOV.UK publishes. That does not settle the question. Tax is only one reason to incorporate, and the examples leave out several things that can change the answer.

Figures were checked against GOV.UK on 11 October 2026 and apply to the 2026 to 2027 tax year (6 April 2026 to 5 April 2027). Income Tax bands differ if you live in Scotland, so the examples use the rates for England, Wales and Northern Ireland.

How each structure is taxed

A sole trader pays Income Tax and Class 4 National Insurance on the whole profit. A company pays Corporation Tax on its profit first, and its owner is taxed again on whatever they take out.

Sole trader

A sole trader is taxed on the business's profit as personal income, whether or not you take the money out. For 2026 to 2027 the Personal Allowance is £12,570, then 20% up to £50,270, 40% up to £125,140 and 45% above that (Income Tax rates). You also pay Class 4 National Insurance of 6% on profits between £12,570 and £50,270 and 2% above £50,270. Class 2 is treated as paid once profits reach £7,105 (self-employed National Insurance rates). The bill is settled through Self Assessment, and GOV.UK says to pay it by 31 January (Self Assessment tax returns). Sole traders above an income threshold must also use Making Tax Digital for Income Tax, covered below.

Limited company

A limited company pays Corporation Tax on its own profit. The rate is 19% up to £50,000 and 25% above £250,000, with a sliding rate in between through Marginal Relief (Corporation Tax rates). What you take out is taxed separately. Salary carries Income Tax and National Insurance. The company also pays employer's National Insurance of 15% on pay above £5,000 a year (rates and thresholds for employers).

Dividends are paid from profit after Corporation Tax, and the company cannot count them as a cost (running a limited company). Each person has a £500 dividend allowance. Above it, the 2026 to 2027 rates are 10.75% for basic-rate taxpayers, 35.75% for higher-rate and 39.35% for additional-rate (tax on dividends).

Worked examples at £30,000, £50,000 and £80,000 of profit

Each example is one owner with no other income. The sole trader pays Income Tax and Class 4 National Insurance on the whole profit. The company pays the owner a £12,570 salary, pays Corporation Tax on what is left and then pays out every remaining pound as a dividend. "Profit" means profit before the owner's pay. Figures are rounded to the nearest pound.

Here is the £50,000 case in full. As a sole trader you pay £7,486.00 Income Tax plus £2,245.80 Class 4 National Insurance, a total of £9,731.80. Through a company, the £12,570 salary costs £1,135.50 in employer's National Insurance. That leaves £36,294.50 of profit, on which Corporation Tax at 19% is £6,895.96. The remaining £29,398.55 is paid as a dividend, and after the £500 allowance the 10.75% dividend tax is £3,106.59. The three company-side bills add up to £11,138.05.

These examples leave out accountancy fees, pension contributions, student loan repayments and other income. We also tested a £5,000 salary instead of £12,570, and the company route cost more in all three cases (£11,601 against £9,732 at £50,000, for example). A different salary changes the figures but not the direction. A company whose only employee is its sole director cannot claim the £10,500 Employment Allowance (GOV.UK). That is why the examples charge the full employer's National Insurance on the salary.

Higher profits do not reverse the result in these examples. Between £50,270 and £100,000 of profit, a sole trader's combined marginal rate is 42%: 40% Income Tax plus 2% Class 4. Profit that goes through a company meets Corporation Tax first and then 35.75% dividend tax. Together they come to a higher combined rate in every Corporation Tax band. Above £100,000 the Personal Allowance starts to taper, which these examples do not model.

When a limited company still makes sense

The reasons that survive the arithmetic are mostly about risk and timing.

• Liability. A limited company is legally separate from its owners, who are responsible for its debts only up to the value of their investment. A sole trader has unlimited liability and is personally responsible for all of the business's debts (GOV.UK).
• Profit you leave in the business. Money you do not need to spend stays in the company, taxed at Corporation Tax rates rather than your personal rates. It is taxed again when you take it out, so this defers tax and may lower it, but does not remove it.
• Outside money and co-owners. GOV.UK notes that limited companies can apply for business loans and investment (set up a limited company). If you start with a co-founder, a written shareholders' agreement is worth having drafted properly, and a solicitor listed on MyLocalSolicitors.co.uk is one place to start.
• Switching later. GOV.UK says you can move from one structure to another, and that it is usually easier to go from sole trader to limited company. Starting as a sole trader and incorporating once the case is clear is a legitimate route.

What a limited company adds to your admin

Registering costs £100 online (set up a limited company). After that the company has deadlines a sole trader does not (accounts and tax returns for private limited companies):

• annual accounts to Companies House within 9 months of the financial year end
• Corporation Tax paid 9 months and 1 day after the accounting period ends
• a Company Tax Return to HMRC within 12 months of the accounting period ending
• a confirmation statement at least every 12 months
• a dividend voucher for each dividend, and minutes of the directors' meeting that declares it, even if you are the only director (running a limited company)

Late accounts bring an automatic penalty of £150, £375, £750 or £1,500, depending on how late. The penalty doubles if you are late two years running (annual accounts). Directors stay legally responsible even when an accountant does the filing (GOV.UK). A sole trader files one Self Assessment return and keeps the records behind it.

Sole traders have a newer duty too. Making Tax Digital for Income Tax requires quarterly updates sent every three months through compatible software (send quarterly updates). The start date depends on qualifying income: from 6 April 2026 if 2024 to 2025 income was over £50,000, from 6 April 2027 if 2025 to 2026 income is over £30,000, and from 6 April 2028 if 2026 to 2027 income is over £20,000 (who needs to use it).

How to decide

Work out three things before you choose. First, your expected profit after costs. Second, how much of it you need to spend on yourself. Third, how much risk the business carries.

If you spend nearly everything you earn, the table above is your starting point. The case for a company then rests on liability or outside investment. If the business earns more than you spend and you want to build up cash inside it, a company becomes more interesting. The sums then need your own figures, including pensions and any other income.

An accountant can model both routes for your situation. On this site, filter by limited company accounts or company formation if you are leaning towards a company. Use self-assessment if you are staying as you are.