If you've searched this question, you've probably already heard the old advice: "go limited once you're earning over £30,000 and you'll save a fortune in tax." That advice used to be broadly true. In 2026/27, it isn't anymore, at least not automatically.
A sole trader pays income tax and National Insurance on all business profits, while a limited company pays corporation tax on its profits, and the director then pays separate tax on whatever salary and dividends they draw from the company. Because dividend tax rates rose again in April 2026, the gap between the two structures has narrowed significantly, and for many small business owners, the crossover point where a limited company genuinely saves tax now sits much higher than the figure most guides still quote.
This article breaks down exactly how each structure is taxed, walks through real worked examples using current 2026/27 rates, and explains the non-tax factors that matter just as much as the numbers. If you're weighing this decision, it's also worth speaking with an accountant about your specific numbers, since Brandora's Taxation & Accounting services can model both scenarios for your exact profit level before you decide.
What Is a Sole Trader?
A sole trader is the simplest legal structure for running a business in the UK. You and the business are legally the same entity, there's no separation between your personal finances and your business finances. You register with HMRC, keep records of your income and expenses, and report your profits through Self Assessment each year.
As a sole trader, you're personally liable for any business debts, but in exchange, you get minimal admin, no Companies House filings, and complete control over how and when you draw money out of the business, since there's no legal distinction between "business money" and "your money."
What Is a Limited Company?
A limited company is a separate legal entity from the person who runs it. It's registered with Companies House, has its own bank account, and is taxed independently of its director and shareholders. If you run a limited company, you're both a director (who may take a salary) and typically a shareholder (who can receive dividends from company profits).
The company itself pays corporation tax on its profits. You then pay personal tax separately on whatever you extract from the company, whether that's salary, dividends, or both. This two-layer structure is exactly why limited company tax planning is more complex, and why the salary/dividend split matters so much. If you're comparing a UK limited company against an equivalent structure abroad, our breakdown of LLC vs Ltd for e-commerce businesses covers how the two compare for cross-border sellers.
How Sole Traders Are Taxed
Sole traders pay two things on their profits: Income Tax and Class 4 National Insurance.
For 2026/27, the personal allowance is £12,570, the amount you can earn tax-free before Income Tax applies. Above that:
20% (basic rate) on profits from £12,571 to £50,270
40% (higher rate) on profits from £50,271 to £125,140
45% (additional rate) on profits above £125,140
On top of Income Tax, sole traders pay Class 4 National Insurance at 6% on profits between £12,570 and £50,270, and 2% on profits above that. Class 2 National Insurance was abolished in April 2024; if your profits are above the £7,105 Small Profits Threshold, your National Insurance record is protected automatically without any separate payment.
How Limited Companies Are Taxed
Limited companies pay Corporation Tax on their profits, and the rate depends on how much the company makes:
19% (small profits rate) on profits up to £50,000
25% (main rate) on profits above £250,000
Marginal relief applies on profits between £50,000 and £250,000, tapering the effective rate up to a maximum of 26.5% within that band
Once the company has paid Corporation Tax, whatever's left can be paid out to the director as dividends. Dividends are taxed separately, and for 2026/27:
The first £500 of dividend income is tax-free (the dividend allowance)
10.75% on dividends within the basic rate band
35.75% on dividends within the higher rate band
39.35% on dividends within the additional rate band
These dividend rates increased in April 2026, up from 8.75% and 33.75% previously, and the dividend allowance itself has shrunk from £2,000 in 2022/23 down to just £500 today. This combination is exactly why the tax advantage of going limited has narrowed so much in recent years.
Sole Trader vs Limited Company: Quick Comparison
Factor | Sole Trader | Limited Company
Tax on profits | Income Tax (20%/40%/45%) + Class 4 NI (6%/2%) | Corporation Tax (19%–25%) + dividend/salary tax on extraction
Legal status | Same legal entity as the owner | Separate legal entity
Liability | Personally liable for business debts | Limited liability, protects personal assets
Admin burden | Self Assessment only | Companies House filings, annual accounts, corporation tax return
Set-up cost | Free, simple registration | Small formation fee, more ongoing compliance
Perceived credibility | Can look less established to some clients | Often seen as more established or professional
Profit extraction flexibility | Take money out anytime, no extra tax | Salary and dividends both carry separate personal tax
Worked Example: £40,000 Annual Profit
Let's compare take-home income at £40,000 profit, using a common (though simplified) limited company strategy: a director's salary set at the personal allowance (£12,570), with the remaining profit taken as dividends.
Sole Trader at £40,000 profit
Income Tax: £27,430 taxed at 20% = £5,486
Class 4 NI: £27,430 taxed at 6% = £1,645.80
Total tax and NI: £7,131.80
Take-home: £32,868.20
Limited Company at £40,000 profit
Employer NI on £12,570 salary (above the £5,000 secondary threshold): £1,135.50
Corporation Tax at 19% on remaining taxable profit: approximately £4,995.96
Dividend tax at 10.75% on remaining distributable profit (after the £500 allowance): approximately £2,235.83
Total tax, NI, and Corporation Tax: approximately £8,367.29
Take-home: approximately £31,632.71
At this profit level, the sole trader actually keeps around £1,235 more than the limited company director under this simple salary-and-dividend approach, a result that would have surprised most advisers a few years ago, before dividend tax rates rose.
Worked Example: £80,000 Annual Profit
Sole Trader at £80,000 profit
Income Tax: approximately £19,432 (basic and higher rate combined)
Class 4 NI: approximately £2,856.60
Total tax and NI: approximately £22,288.60
Take-home: approximately £57,711.40
Limited Company at £80,000 profit
Employer NI on salary: £1,135.50
Corporation Tax (with marginal relief applying, since profit sits between £50,000 and £250,000): approximately £13,818.04
Dividend tax across basic and higher rate bands: approximately £9,155.88
Total tax, NI, and Corporation Tax: approximately £24,109.42
Take-home: approximately £55,890.58
Even at £80,000 profit, the sole trader structure still comes out slightly ahead in this simplified comparison, around £1,820 more take-home. This reflects a genuinely important shift: the traditional advice that going limited pays off once profits pass £30,000–£40,000 is based on older dividend tax rates and a much larger dividend allowance. At current 2026/27 rates, the crossover point is meaningfully higher, and for many small business owners, it may not be reached at all through salary and dividends alone.
Why the Limited Company Advantage Has Shrunk
A few changes explain this shift clearly:
The dividend allowance dropped from £2,000 to £1,000, then to £500, over just a few years
Dividend tax rates rose again in April 2026, from 8.75%/33.75% to 10.75%/35.75%
Corporation Tax rose from a flat 19% to a tiered 19%–25% system in 2023, meaning larger companies now pay considerably more
Employer National Insurance now applies more broadly, since the secondary threshold dropped to £5,000
None of this means a limited company is never worth it for tax purposes, it's just that the calculation genuinely depends on your specific profit level, how much you need to draw out personally versus retain in the company, and whether you can use additional strategies like pension contributions, income splitting with a spouse shareholder, or retaining profit for future capital growth.
Why People Still Choose a Limited Company Anyway
Tax isn't the only reason business owners incorporate. Several non-tax factors often matter just as much, sometimes more:
Limited liability protection: your personal assets (your house, savings, car) are generally protected if the business runs into debt or legal trouble, unlike as a sole trader
Credibility with clients and lenders: some clients, particularly larger businesses, prefer or require working with a limited company
Retained profit flexibility: a limited company can retain profit inside the business at the corporation tax rate rather than drawing it all out immediately, useful if you don't need all your profit as personal income right now
Easier to sell or transfer: a limited company can be sold, restructured, or have shares transferred more cleanly than a sole trader business
Pension planning: employer pension contributions made by a limited company are often more tax-efficient than personal pension contributions as a sole trader
If any of these matter to your situation, the "which pays less tax" answer might not be the deciding factor at all.
When Does a Limited Company Still Win on Tax?
Based on current 2026/27 rates, a limited company is more likely to be tax-efficient when:
You don't need to draw out all the company's profit as personal income, and can leave some retained in the business
Profits are high enough that additional-rate Income Tax (45%) would apply as a sole trader, since the equivalent dividend rate (39.35%) is still noticeably lower
You can split income with a spouse or family member who is also a shareholder, using their personal allowance and basic rate band too
You want to make employer pension contributions directly from company profits before tax
If none of these apply to your situation, and you simply need to draw most of your profit out as personal income each year, a sole trader structure may genuinely leave you better off under current rates, alongside being far simpler to run.
How to Register as a Sole Trader or Set Up a Limited Company
If you decide sole trader is right for you, registering is straightforward: you register for Self Assessment with HMRC, and you're ready to trade.
If you decide a limited company suits your situation better, whether for liability protection, credibility, or a longer-term tax strategy, you'll need to register with Companies House, set up a business bank account, and stay on top of ongoing compliance requirements like confirmation statements and annual accounts. Our guide on the Companies House compliance checklist walks through exactly what's required to stay in good standing after incorporation, and our breakdown of confirmation statements vs annual accounts explains the difference between these two commonly confused filing obligations.
If you're based outside the UK and considering incorporating a UK company remotely, our guide on how non-UK residents can register a company in the UK covers the process specifically for overseas business owners.
Frequently Asked Questions
Is it better to be a sole trader or a limited company for tax?
It depends on your profit level and how much you need to draw out personally. Under current 2026/27 rates, sole traders often keep more take-home income at moderate profit levels than previously assumed, since dividend tax rates have risen and the dividend allowance has shrunk.
How much can I earn as a sole trader before paying more tax than a limited company?
There's no single fixed figure anymore. Under current rates, the crossover point is significantly higher than the traditional £30,000–£40,000 guideline, often depending on whether you retain profit in the company or draw it all out.
Do limited companies pay less tax than sole traders?
Not automatically. Corporation Tax on its own can be lower than Income Tax, but once you add personal tax on salary and dividends drawn from the company, the total tax burden can end up similar to, or higher than, sole trader tax at many profit levels.
What are the tax disadvantages of a limited company?
Dividend tax on top of Corporation Tax, employer National Insurance on salary, more complex accounting and filing requirements, and less flexibility to "take out" money without a tax consequence.
Can I switch from sole trader to limited company at any time?
Yes. There's no fixed deadline; you can incorporate whenever it makes sense for your business, though it's worth planning the transition around your accounting year end for simpler bookkeeping.
Do I need an accountant if I become a limited company?
It's not a legal requirement, but limited company accounting, corporation tax returns, and payroll are considerably more complex than sole trader Self Assessment, so most directors work with an accountant or a service like Brandora Services to stay compliant and tax-efficient.
Final Thoughts
For years, "go limited to save tax" was treated as near-universal advice for UK small business owners. In 2026/27, that advice needs a serious caveat. Rising dividend tax rates and a shrinking dividend allowance mean that, for many sole traders drawing most of their profit out personally, staying a sole trader can genuinely leave more money in your pocket, at least until profits reach a level where retaining profit, splitting income, or using pension contributions starts to tip the balance back toward incorporation.
The right answer depends entirely on your specific numbers, your business plans, and factors beyond tax, such as liability protection and credibility. According to HMRC guidance, sole traders must register for Self Assessment. In contrast, limited companies must register separately with Companies House and file corporation tax returns, two very different compliance paths worth weighing alongside the tax numbers themselves.
Not sure which structure fits your situation? Brandora Services' ACCA and CA-certified tax team can run the exact numbers for your profit level and business goals, and help you register, whether that's sole trader Self Assessment or full limited company formation, correctly from day one. Book a free consultation to get a clear answer, not just a rule of thumb.