- For 2025/26, a limited company only beats sole trader status on take-home pay across roughly £55,000 to £75,000 of profit, and the gap is small.
- Corporation tax rising to 25% and Class 4 National Insurance falling to 6% removed most of the old tax advantage.
- Limited liability, credibility with larger clients and retaining profit are now the stronger reasons to incorporate.
- A company costs roughly £500 to £1,500 a year in accountancy and filing. Treat any tax saving smaller than that as no saving.
Before you read a word of this: the answer changed in 2024 and most advice online has not caught up. If someone tells you to go limited at thirty grand, they are quoting a rule that expired.
Almost every new business in the UK starts as a sole trader, and a good number incorporate later because someone told them it saves tax. For a long time that advice was right. Since April 2023 it has been steadily less right, and for many businesses it is now simply wrong.
This guide covers what actually separates the three structures, what the numbers look like at current rates, and how to decide. If you only want the arithmetic, the sole trader vs limited company calculator will do it on your own figures.
The three structures, side by side
Nearly every small UK business uses one of three legal forms. Partnerships and limited liability partnerships matter if you are going into business with someone else, but the real decision for most people is between the first and the last row here.
| Sole trader | Partnership | Limited company | |
|---|---|---|---|
| Who owns it | You | Two or more partners | Shareholders, separate from the business |
| Personal liability | Unlimited | Unlimited, and joint | Limited to your shares |
| Taxed how | Income tax and Class 4 NI on profit | Each partner on their share | Corporation tax, then dividend tax on extraction |
| Public filings | None | None | Accounts and confirmation statement at Companies House |
| Set-up | Register for Self Assessment | Register the partnership | Incorporate, from £50 |
| Running cost | Low | Low | £500 to £1,500 a year typically |
It describes how the business is owned and taxed, not how many people work in it. A sole trader can employ staff, register for VAT and turn over hundreds of thousands of pounds.
What changed, and why the old advice is out of date
The rule of thumb many accountants used for years was that incorporating started paying for itself somewhere around £30,000 to £40,000 of profit. That rule assumed corporation tax was a flat 19% and that self-employed Class 4 National Insurance was 9%. Both halves of that assumption have gone.
Two changes landed within about a year of each other, and they pushed in the same direction:
Company profit is taxed twice on its way to you. Corporation tax is charged on the profit, and then dividend tax is charged when you take what is left. Sole trader profit is taxed once. When corporation tax was 19% and Class 4 NI was 9%, the company route absorbed that double charge and still came out ahead. At 25% and 6%, it often does not.
Incorporating is no longer a tax decision for most small businesses. It is a liability and credibility decision that happens to be roughly tax neutral.
What the numbers actually look like
The table below compares take-home pay under both structures at 2025/26 rates, assuming you extract all the profit in the same tax year and take a £12,570 director's salary from the company. Figures are for England, Wales and Northern Ireland.
| Annual profit | Sole trader | Limited company | Difference |
|---|---|---|---|
| £30,000 | £25,468 | £24,657 | −£811 |
| £50,000 | £40,268 | £39,440 | −£828 |
| £60,000 | £46,111 | £46,831 | +£720 |
| £70,000 | £51,911 | £51,935 | +£24 |
| £80,000 | £57,711 | £56,804 | −£907 |
| £100,000 | £69,311 | £66,543 | −£2,768 |
| £200,000 | £118,540 | £108,006 | −£10,534 |
Two things stand out. The company only wins across a narrow band in the middle, roughly £55,000 to £75,000, and even there it wins by a few hundred pounds. Above that band the gap widens sharply against the company, because the profit is meeting the 25% corporation tax band and then the higher and additional dividend rates on the way out.
At £60,000 of profit the company looks £720 better off. A company also costs you an accountant, annual accounts, a corporation tax return, a confirmation statement and payroll. That is usually £500 to £1,500 a year. The advantage disappears entirely.
This comparison assumes you take every penny out each year, which is the single biggest limitation. See retained profit below for why that matters.
Which structure fits your situation?
Work through the questions below. It takes about thirty seconds and it weighs the things that actually decide this, rather than tax alone.
Every answer from the questions above, if you would rather read them all at once.
A limited company is probably worth it regardless of tax
If you answered: Yes, genuinely
Limited liability is the point here. As a sole trader, a claim that exceeds your insurance reaches your personal savings and potentially your home. Inside a company, your exposure is generally limited to what you put in.
It is not absolute. Directors can still be personally liable for their own negligence, for wrongful trading, and for anything they personally guarantee, which includes most small business loans and commercial leases. But it is a real and meaningful layer of protection.
Get proper professional indemnity or public liability cover as well. The company structure and the insurance do different jobs.
Incorporate, and treat the tax position as a side issue
If you answered: Not really › Yes, or probably soon
If being a limited company is the difference between winning work and not winning it, the few hundred pounds either way on tax is not the deciding factor. Revenue you cannot access is a much bigger number.
Budget for the extra admin and get an accountant from the start. Keep the director's salary at £12,570 unless you have other employees, and take the rest as dividends.
Stay a sole trader
If you answered: Not really › No › Under £50,000
At this level a sole trader keeps more of the profit and carries almost none of the administrative load. There is no filing at Companies House, no corporation tax return, no payroll and usually no need for an accountant beyond help with your Self Assessment.
You can incorporate later. Plenty of businesses do, and transferring a going concern into a company is a well-trodden path.
It is close to a coin flip, so decide on the non-tax factors
If you answered: Not really › No › £50,000 to £80,000 › I need all of it
You are in the narrow band where a company edges ahead on tax, but by a few hundred pounds a year at most. Accountancy and filing costs will absorb that.
Decide on liability, on how you want to be perceived by clients, and on how much administration you are willing to take on. If none of those push you towards a company, staying a sole trader is the simpler and cheaper answer.
A limited company starts to make real sense
If you answered: Not really › No › £50,000 to £80,000 › I could leave some in
This is where the company structure earns its keep. Profit you leave inside the company is charged corporation tax and nothing else. You are not personally taxed on it until you draw it, which means you can take it in a later year when your income is lower, or use it to fund growth.
Employer pension contributions strengthen the case further. They are deductible against corporation tax and avoid National Insurance and dividend tax entirely.
Get advice, because the simple comparison stops being useful here
If you answered: Not really › No › Over £80,000
On a straight extract-everything basis, a sole trader keeps noticeably more at this level. But at higher profits the planning options that only a company offers start to outweigh the headline comparison: pension contributions, retaining profit across years, bringing in a spouse or business partner as a shareholder, and eventually selling the business with the reliefs that attach to shares.
This is the point where an hour with a good accountant pays for itself many times over. Take the calculator output with you as a starting point rather than a conclusion.
What limited liability actually protects
This is the most misunderstood part of the decision, in both directions. People either assume a company makes them untouchable, or they dismiss the protection as meaningless.
What it does protect. The company is a separate legal person. It owns the contracts, the debts and the liabilities. If it cannot pay them, creditors generally pursue the company rather than you, and your loss is limited to the money you put in.
What it does not protect. A director is still personally liable for their own negligence, for fraud or wrongful trading, for unpaid PAYE and National Insurance in some circumstances, and for anything they personally guarantee. That last one matters more than people expect, because lenders and landlords routinely require a personal guarantee from the director of a small company. A personal guarantee steps straight past the protection you incorporated for.
Limited liability caps what a creditor can reach if the business fails. Professional indemnity and public liability insurance pay claims while the business is trading. You generally want both, and a company is not a substitute for cover.
The retained profit argument
Every comparison in this guide, and in the calculator, assumes you take all the profit out in the same tax year. That is the fairest like-for-like test, and it is also the worst case for a company.
As a sole trader you are taxed on the profit whether you spend it or not. There is no way to leave it in the business and defer the charge. A company works differently. Profit that stays in the company has paid corporation tax and nothing more. You choose when to take it.
That gives you three things a sole trader does not have:
- Timing. Draw dividends in a year when your other income is low, and they may fall entirely within the basic rate band.
- A war chest. Retained profit funds equipment, hiring or a lean quarter without a personal tax charge on money you never spent.
- Pension headroom. Employer contributions from the company are corporation tax deductible and skip National Insurance and dividend tax completely.
If your income is lumpy, or you are deliberately building reserves, the company can be meaningfully better than the table above suggests. If you need every penny each year to live on, the table is accurate.
The admin you are signing up for
This is the cost people underestimate. A sole trader files one Self Assessment return a year. A limited company takes on all of the following, every year, with deadlines and penalties attached:
Annual obligations for a limited company
0 of 8None of it is hard. All of it takes time or money, and the penalties for missing deadlines are automatic. Most small companies pay an accountant somewhere between £500 and £1,500 a year to handle it, which is the number you should subtract from any tax advantage before deciding.
How to switch, if you decide to
Moving from sole trader to limited company is common and the process is well established. In outline:
Incorporate the company
Register at Companies House, usually online and from £50. You will need a company name, a registered office address, at least one director and details of the shareholders.
Transfer the business
The company takes over the trade, the assets and usually the goodwill. There can be a capital gains charge on the transfer, and there are reliefs that may apply. This is the part to take advice on.
Move the practical plumbing
New business bank account in the company name, contracts and terms reissued, insurance updated, and your VAT registration either transferred or re-registered.
Set up payroll and tell HMRC
Register the company for corporation tax and PAYE, set your director's salary, and tell HMRC you have stopped trading as a sole trader so your Self Assessment record is correct.
If your work carries real liability risk, or your clients require a company, incorporate and stop thinking about the tax. If neither applies and your profit is under about £50,000, stay a sole trader. In between, run your own numbers and subtract the cost of an accountant before you decide.