2026/27 Tax Year

Sole trader vs limited company: which structure actually saves you more?

Enter your turnover and expenses to see which UK business structure keeps more in your pocket for 2026/27. We compare sole trader (income tax and Class 4 NI on profit) against limited company (corporation tax, dividend tax and optimised director salary) pound-for-pound.

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Key takeaways

Below roughly £40,000 of profit a sole trader is both cheaper and simpler. On this model the pure tax gap is about £1,200 a year in the sole trader's favour at £40,000, before a limited company's accountancy fees and admin are counted at all.
On pure tax, and assuming a limited company distributes all of its post-corporation-tax profit each year, the sole trader route is cheaper at almost every level in 2026/27. The limited company only edges ahead between roughly £60,200 and £62,600 of profit, and by under £100 a year even there. Above that the gap widens against it, reaching about £4,000 a year at £100,000 of profit.
Limited companies cost around £600–£1,500/year in accountancy fees, plus £34 Companies House confirmation statement. Factor this into your break-even analysis.
A limited company gives stronger liability protection (your personal assets are shielded from business debts) and more flexibility for pension planning via employer contributions.
Structure is not a one-way door. Most sole traders can incorporate cleanly with incorporation relief; many incorporated businesses can be wound down via Members' Voluntary Liquidation if circumstances change.

How it works

Three inputs, one clear answer

Enter your turnover

Your total annual revenue before expenses and taxes — what you invoice customers.

Add allowable expenses and pension

Business costs that reduce taxable profit, plus any pension contributions you want to make.

See the pound-for-pound comparison

Annual net take-home under each structure, with a clear verdict on which is more tax-efficient at your profit level.

The short answer

In 2026/27, sole trader is usually better below £40,000 profit because the limited-company setup costs (accountancy, filing, payroll) outweigh the small tax saving. Limited company is usually better above £50,000 profit — but by a tighter margin than most online calculators suggest, thanks to 2023's corporation tax increases and the reduction of the dividend allowance to £500.

Between £40,000 and £50,000 the sole trader route is ahead by roughly £1,200 to £1,400 a year on pure tax, so a limited company has to earn its place on other grounds: liability protection, pension planning flexibility, perception by larger clients, and your tolerance for admin.

How each structure is taxed

Sole trader

You pay income tax and Class 4 NI on your profit after allowable expenses. That's it — one tax return (Self Assessment), paid by 31 January following the end of the tax year. Class 2 NI was abolished from April 2024.

Income tax: 20% on profit from £12,570–£50,270, 40% to £125,140, 45% above.
Class 4 NI: 6% from £12,570–£50,270, 2% above.

Limited company

Your company pays corporation tax on profit, then you pay personal tax on whatever you extract (salary or dividends). Two layers, two sets of returns.

Corporation tax: 19% up to £50k profit, 26.5% effective from £50k–£250k, 25% above.
Director salary: usually £12,570 — uses the full personal allowance with minimal employer NI.
Dividend tax: 10.75% / 35.75% / 39.35% on dividends above the £500 allowance, stacked on your salary to determine rate band.

At £80,000 turnover with £3,000 of expenses, a sole trader nets about £55,970 after tax. A limited company director on a £12,570 salary drawing the rest as dividends nets about £54,470, so the sole trader is roughly £1,500 a year ahead before accountancy fees are counted at all. The gap widens as profit rises, to about £4,000 a year at £100,000 of profit, because corporation tax and then dividend tax stack on the same money.— GoForma technical team, 2026/27 tax year modelling

The factors that aren't about tax

Liability protection — a limited company shields your personal assets from business debts. Sole traders are personally liable for everything.
Credibility and client policies — many larger clients, public-sector bodies and recruitment agencies only contract with limited companies.
Pension flexibility — limited company employer pension contributions reduce both corporation tax AND NI, making them materially more efficient than sole trader personal contributions.
Income deferral — limited companies can retain profits in the company and pay dividends in a later, lower-tax year. Sole traders are taxed on all profit in the year earned.
Setup and exit cost — limited companies cost £50 to set up, £34/year for the Confirmation Statement, and ~£1,500–£3,000 to wind down via MVL if you want the remaining assets out at CGT rates.

Switching from sole trader to limited company

Incorporating an existing sole-trader business is a one-day exercise: register the company at Companies House (£50), transfer trade and assets to the new company, close the sole-trader with HMRC, and start Running Payroll for your director salary. Incorporation relief usually defers any capital gains tax on the transfer of goodwill.

Going the other way (winding down a limited company and returning to sole trader) is more involved. For accumulated profits under £25,000, an informal strike-off works; above that, a Members' Voluntary Liquidation (MVL) is usually the most tax-efficient route — Business Asset Disposal Relief (formerly Entrepreneurs' Relief) can apply at 14% CGT for 2026/27.

Who it's for

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Freelancers growing past £40k

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Day-rate contractors weighing Ltd vs sole trader structure.

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Tradespeople, trainers, therapists and small agencies at the point of incorporation.

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Questions answered

Frequently asked questions

At what profit does a limited company become more tax-efficient than sole trader?

On this calculator's assumptions there is no durable break-even in 2026/27. A limited company only edges ahead between roughly £60,200 and £62,600 of profit, and by under £100 a year at that. Below and above that band the sole trader route costs less on pure tax, by about £1,400 at £50,000 of profit and about £4,000 at £100,000. The reason is that the model distributes all post-corporation-tax profit as dividends each year, so the same money is taxed twice. If you retain profit in the company, contribute to a pension through it, or qualify for the Employment Allowance, a limited company looks better than this comparison suggests.

Is a limited company always more tax-efficient than sole trader?

No, and in 2026/27 it is usually the other way round. Corporation tax rises since 2023, the dividend allowance falling from £2,000 to £500, and the April 2026 increase in dividend rates to 10.75% and 35.75% have removed most of the old advantage. On a full-distribution model the sole trader route is cheaper at almost every profit level. A limited company still wins on liability, on pension contributions made by the company, and wherever profit can be retained rather than drawn. Model your own position before deciding.

Can I switch from sole trader to limited company?

Yes, and it's straightforward. Register a limited company, transfer your business to it (incorporation relief usually defers any CGT on goodwill), close the sole trader with HMRC, and set up PAYE for your director salary. Most accountants can handle the full transition in a week or two.

What are the downsides of being a limited company?

More admin: annual accounts, corporation tax return, Confirmation Statement, payroll. Stricter rules on what you can take out and when. Public filings at Companies House (your accounts and officers are searchable). Higher accountancy fees. Penalties if you file late.

Does a limited company offer better protection?

Yes, in most cases. A limited company is a separate legal entity, so business debts stay with the company not you personally ("limited liability"). Exceptions: personal guarantees on loans, directors' fiduciary duty breaches, and wrongful trading near insolvency. Sole traders have no such protection — personal assets can be seized to satisfy business debts.

Can I pay family members via a limited company to reduce tax?

You can pay a spouse or adult child for legitimate work done for the company, as long as the salary is reasonable for the work performed. This can use their personal allowance and basic-rate band, saving tax. But HMRC's "settlements" rules apply to gifted shares — get this structured properly to avoid challenge.

Is VAT registration the same for both structures?

Yes. The £90,000 VAT registration threshold applies to the business, not the structure. Both sole traders and limited companies must register within 30 days of turnover exceeding £90,000 in any rolling 12-month period. Voluntary registration below the threshold is also available to either.

What does it cost to set up a limited company?

£50 directly via Companies House (online), or free to £200 via a formation agent depending on the package. Annual ongoing costs: £34 Confirmation Statement, plus accountancy of £600–£1,500/year depending on complexity. A sole trader costs nothing to register beyond a five-minute HMRC form.

Sources and methodology

Every rate this calculator applies is sourced from HMRC and the UK Government, current for the 2026/27 UK tax year.