Sole trader vs limited company: which is better for tax in 2026/27?

The sole trader vs limited company choice is about who legally runs the business. As a sole trader, you and the business are the same person. You keep all the profit after tax, and you pay income tax and National Insurance on it through Self Assessment.

A limited company is a separate legal person. It pays corporation tax (tax on company profits) on what it earns. You are usually a director and shareholder, and you take money out as a salary, dividends (payments to shareholders from profit after tax), or both.

Here is a simplified, hypothetical comparison for 2026/27. Say your business makes a profit of £50,000 before paying yourself. You have no other income, you live in England, and you take all the profit out.

As a sole trader, your whole £50,000 profit is taxed as your income.

The whole £37,430 falls inside the £37,700 basic rate band, so none of it is taxed at 40%. Class 2 National Insurance is treated as paid because profits are over £7,105, so you still get State Pension credit without paying it.

As a limited company, the company pays you a salary of £12,570, which uses up your personal allowance. The rest of the profit is taxed at 19% and paid to you as dividends.

The dividends of £30,318.30 all sit inside the £37,700 basic rate band, because the salary has used the personal allowance. So all the taxable dividends are taxed at the basic dividend rate of 10.75%.

Tax is only one part of the decision, and the example above takes every penny out. A company can work better when:

• You do not need all the profit. Profit left in the company is taxed at 19% (on profits up to £50,000) rather than at your personal rates. You pay dividend tax only when you take it out.
• Your profits are higher. As a sole trader, profit over £50,270 is taxed at 40% plus 2% Class 4. Through a company you have more control over when and how much income you take.
• You want limited liability. If the business takes on contracts, staff or premises, keeping business debts separate from your home and savings can matter more than a small tax difference.
• Clients expect it. Some larger clients and agencies prefer, or require, to work with limited companies.

Being a sole trader often makes more sense if profits are modest, you need all of the money to live on, or you want to keep paperwork and costs low. Our self-employed accounting service and the self-employed tax calculator can help you see where you stand.

You also need to keep company money separate from your own, keep proper records, and be careful about how you take money out. Dividends can only be paid from profits after tax. This is why accountancy fees for companies are higher. You can compare costs in how much does an accountant cost.

If you are a contractor working through your own limited company, the off-payroll working rules (IR35) may apply. In short, if you would be treated as an employee were it not for your company, you can end up paying tax much like an employee, which removes most of the tax difference. Whether IR35 applies depends on each contract. See our page for contractors.

1. 1

   Check the numbers first

   Compare your likely take-home both ways, including the extra running costs, before you commit.

2. 2

   Form the company

   Register the company at Companies House and set up a separate business bank account.

3. 3

   Tell HMRC you have stopped as a sole trader

   Your final sole trader period still goes on your Self Assessment return.

4. 4

   Move contracts and assets across

   Update clients, suppliers and insurance. Moving equipment or goodwill to the company can have tax consequences, so get advice before you do it.

5. 5

   Set up payroll and other registrations

   Register for PAYE if you will pay a salary, and update VAT if you are registered.

Our company formation and advisory service handles these steps with you, and our limited company accounts service looks after the yearly filings.

We look at your actual profit, other income and plans, then show you the figures both ways, so you can decide with the numbers in front of you. You speak to the person doing the work, and our advice is overseen by an ICAEW Chartered Accountant.

Our fixed monthly fees start from £99 for sole traders and £150 for limited companies, with an exact price in writing within one working day after a free 20-minute chat. Book your free chat if you would like a second opinion.