Sole trader vs limited company is the first structural decision most UK businesses make, and the 2026/27 tax year has shifted the arithmetic. Dividend tax rose by 2 percentage points on 6 April 2026, employer National Insurance stands at 15% above a £5,000 threshold, and a company whose only employee is its director cannot use the Employment Allowance to offset it. At the same time, Making Tax Digital for Income Tax now applies to sole traders with qualifying income above £50,000, and Budget 2026 on 28 October 2026 confirmed most National Insurance thresholds stay frozen to 2030/31 and corporation tax stays at 19% and 25%.
Corporate INTL Newsroom · Tax
Sole Trader vs Limited Company: Tax at £30k, £50k and £100k and Which Suits You
By The Corporate INTL Newsroom · 6 November 2026
This guide compares the two structures on tax, liability and paperwork, works through the numbers at £30,000, £50,000 and £100,000 of profit, and sets out which suits whom.
Sole trader vs limited company: the short answer
A sole trader and the business are the same legal person: profits are the owner's income, and the owner is liable for every business debt. A limited company is a separate legal person that pays corporation tax on its own profits; its owners extract money as salary or dividends, and their liability is normally limited to what they put in.
| Issue | Sole trader | Limited company |
|---|---|---|
| Legal status | No separation between you and the business | Separate legal person, run by directors |
| Liability for debts | Unlimited: your home and savings are exposed | Limited to your investment, unless you give personal guarantees |
| Tax on profits | Income tax at 20%, 40% or 45% plus Class 4 NICs of 6% or 2% | Corporation tax at 19% to 25%, then tax on salary and dividends you take out |
| Set-up | Register for Self Assessment; no fee | Incorporate at Companies House; £100 online, directors must verify identity |
| Annual filings | Self Assessment return; quarterly MTD updates once in scope | Accounts, confirmation statement (£50), Company Tax Return, payroll, personal returns |
| Privacy | Accounts are not published | Accounts and officer details are on the public register |
| Access to money | Every pound of profit is yours to draw | Money belongs to the company; drawings must follow salary, dividend or loan rules |
How each structure is taxed in 2026/27
Sole traders: income tax and Class 4
A sole trader pays income tax on taxable profit. For 2026/27 the Personal Allowance is £12,570, the basic rate of 20% runs to £50,270, the higher rate of 40% applies above that, and 45% applies above £125,140. The allowance is withdrawn by £1 for every £2 of income above £100,000. Scotland has its own bands, so this guide assumes England, Wales or Northern Ireland.
On top sits National Insurance. HMRC's self-employed National Insurance rates for 2026/27 are Class 4 at 6% on profits between £12,570 and £50,270 and 2% above. Class 2 is no longer compulsory: with profits of £7,105 or more it is treated as paid, protecting your State Pension record, and below that you may pay voluntarily at £3.65 a week. The combined marginal rate is therefore 26% in the basic band and 42% in the higher band.
Limited companies: corporation tax and dividends
A company pays corporation tax at the small profits rate of 19% on profits up to £50,000 and the main rate of 25% above £250,000, with marginal relief in between. Both limits shrink for associated companies and short accounting periods. Marginal relief is calculated by charging the whole profit at 25% and deducting a standard fraction of 3/200 of the gap between profit and £250,000, which makes the rate on each extra pound between the limits 26.5%.
Profit the company has paid tax on can then be paid out as dividends. Every individual has a £500 dividend allowance; above it, dividends are taxed at 10.75% in the basic band, 35.75% in the higher band and 39.35% in the additional band. The first two rates were 8.75% and 33.75% until 5 April 2026, an increase announced in the Budget 2025 tax package.
Salary or dividends: the director's pay strategy
The usual answer is a modest salary plus dividends, but the right salary has moved. HMRC's rates and thresholds for employers in 2026/27 set the secondary threshold at £5,000 a year and employer Class 1 National Insurance at 15% above it. Employee contributions start at the £12,570 primary threshold, and a salary at or above the £6,708 lower earnings limit earns a qualifying year for the State Pension. See our report on the rise to 15%.
The Employment Allowance, worth £10,500 in 2026/27, would wipe out that employer charge for most small companies. The catch is in HMRC's eligibility rules: if a company has only one director, that director must not be the only employee liable for secondary Class 1 contributions. A typical one-person company therefore cannot claim it, and pays 15% on any salary above £5,000.
Even so, a £12,570 salary usually still beats a lower one for a one-person company. Each extra £1 of salary costs £1.15 with employer contributions, but the whole £1.15 is deductible for corporation tax, and the salary itself is covered by the Personal Allowance. On our figures, a £12,570 salary leaves the owner around £460 to £750 a year better off than a £5,000 salary at the three profit levels below.
Sole trader vs limited company tax: worked comparison
The table runs the same pre-tax profit through each structure. Method: the sole trader pays income tax and Class 4 on the whole profit. The company pays its director a salary of £12,570, plus employer National Insurance of £1,135.50 (15% of £7,570), deducts both, pays corporation tax on the rest and distributes everything left as a dividend in the same tax year.
Assumptions: 2026/27 rates for England, Wales and Northern Ireland; one owner with no other income, pension contributions or student loan; a 12-month accounting period with no associated companies; no Employment Allowance; and profit measured before any pay to the owner. Figures are rounded to the nearest pound.
| Profit before owner's pay | £30,000 | £50,000 | £100,000 |
|---|---|---|---|
| Sole trader: income tax | £3,486 | £7,486 | £27,432 |
| Sole trader: Class 4 NICs | £1,046 | £2,246 | £3,257 |
| Sole trader: total tax | £4,532 | £9,732 | £30,689 |
| Company: employer NICs on £12,570 salary | £1,136 | £1,136 | £1,136 |
| Company: taxable profit | £16,295 | £36,295 | £86,295 |
| Company: corporation tax | £3,096 (19%) | £6,896 (19%) | £19,118 (marginal relief) |
| Dividend paid | £13,199 | £29,399 | £67,176 |
| Owner: dividend tax | £1,365 | £3,107 | £14,537 |
| Company route: total tax | £5,597 | £11,138 | £34,790 |
| Owner keeps: sole trader | £25,468 | £40,268 | £69,311 |
| Owner keeps: company | £24,403 | £38,862 | £65,210 |
| Difference | £1,065 to sole trader | £1,406 to sole trader | £4,102 to sole trader |
Two workings show the method. At £50,000, taxable company profit is £50,000 less £12,570 salary and £1,135.50 employer contributions, so £36,294.50; corporation tax at 19% is £6,895.96, leaving a £29,398.54 dividend. The first £500 is tax free and £28,898.54 is taxed at 10.75%, giving £3,106.59. At £100,000, taxable profit is £86,294.50; 25% of that is £21,573.63, less marginal relief of 3/200 of £163,705.50 (£2,455.58), giving £19,118.04. Of the £67,176.46 dividend, £37,700 falls in the basic band (£500 of it tax free) and £29,476.46 in the higher band, for dividend tax of £14,536.83.
The headline is stark: drawing out every pound, the sole trader pays less at all three levels. In the basic band the company route costs about 27.7% on dividend profits (19% corporation tax, then 10.75% on what is left) against 26% for a sole trader; in the higher band it costs about 48% to 53% against 42%.
Where the company still wins
The company comes out ahead when profit stays in it. At £100,000 of profit, an owner who takes only a £12,570 salary and a £37,700 dividend, keeping within the basic band, pays £24,253 in total this year and leaves £29,476 in the company, against £30,689 for the sole trader. Retained money is taxed again when drawn, so the gain is largely a deferral unless it funds investment. A company that employs other staff and can claim the Employment Allowance also recovers its employer contributions.
Limited liability and personal guarantees
Limited liability is the strongest non-tax reason to incorporate: a sole trader who cannot pay suppliers or a damages claim can lose personal assets, while a shareholder normally risks only the money invested. Our guide to chasing a customer who will not pay an invoice shows how quickly unpaid debts escalate.
The protection is narrower than many assume. Banks and landlords commonly ask small-company directors for personal guarantees, which put the director back on the hook. Directors who keep trading when the company cannot pay its debts risk personal liability and disqualification if it fails; see what happens when a company goes into administration.
Admin: Companies House, payroll and returns
A sole trader files one Self Assessment return a year. A company has more moving parts, and higher accountancy fees to match:
- Incorporation and identity. Incorporating online costs £100. Since 18 November 2025 identity verification has been a legal requirement: new directors verify on appointment and existing directors by their company's next confirmation statement; see our report on mandatory identity verification.
- Confirmation statement. Filed at least once a year with a £50 online fee; it cannot be filed until every director has supplied a verified personal code. The regime flows from the new Companies House powers under the ECCT Act.
- Accounts and tax return. Annual accounts go on the public register, and a Company Tax Return goes to HMRC; our guide on how to file accounts with Companies House covers deadlines and penalties.
- Payroll. Paying a director's salary means running PAYE in real time, even for one person.
Making Tax Digital for Income Tax
Making Tax Digital for Income Tax is the biggest new burden on sole traders; companies are outside it. HMRC's MTD for Income Tax guidance sets the timetable by qualifying income, meaning gross self-employment and property income, not profit:
- From 6 April 2026: qualifying income over £50,000 in 2024/25.
- From 6 April 2027: qualifying income over £30,000 in 2025/26.
- From 6 April 2028: qualifying income over £20,000 in 2026/27.
Those in scope keep digital records and send quarterly updates through compatible software, so a sole trader turning over £35,000 is caught from next April however small the profit. For very small side income, the Budget 2026 overview of tax legislation confirms the trading allowance rises from £1,000 to £3,000 from 6 April 2027.
IR35 for contractors
Contractors who work through their own company face the off-payroll working rules, known as IR35. HMRC's off-payroll working guidance says the rules apply where a worker would have been an employee if engaged directly. For medium and large private-sector clients and all public-sector clients, the client decides status and, if the rules apply, the deemed employer deducts income tax and employee National Insurance and pays employer contributions. For small private-sector clients, the contractor's own company decides. Inside IR35, most of the company structure's tax advantage disappears; for related questions of employment status, see our report on the Uber payroll tax ruling.
VAT, credibility and getting money out
VAT is neutral between the two: both must register once taxable turnover in the previous 12 months goes over £90,000, or is expected to in the next 30 days, and both may register voluntarily below it. Credibility is not: some larger clients and agencies prefer, or insist on, a limited company, and a company structure helps when raising finance, bringing in co-owners or selling the business later; see our comparison of share sale vs asset sale.
Getting money out is where many new directors trip, because company money is not the owner's. Dividends can be paid only from distributable profits, salary must run through payroll, and personal spending from the company account creates a director's loan that has tax consequences if not repaid. A sole trader simply draws what is in the account.
Moving from sole trader to limited company
Moving from sole trader to limited company means transferring the business to a new company, usually in exchange for shares. That is a disposal for capital gains tax, often of goodwill. Section 162 of the Taxation of Chargeable Gains Act 1992 rolls the gain into the base cost of the shares where a non-company transfers the whole business as a going concern, with all its assets other than cash, wholly or partly for shares.
The relief changed this year. Finance Act 2026 made it claim-based for transfers on or after 6 April 2026: the transferor must make a claim by the first anniversary of the 31 January after the tax year of the transfer, and the old election to disapply the relief has been repealed. A sole trader incorporating in November 2026 therefore has until 31 January 2029 to claim. You also need to tell HMRC the sole trade has ceased and move contracts, bank accounts, insurance and any VAT registration across.
Which suits you
The sole trader vs limited company choice turns on profit, how much of it you need to spend, risk and who your clients are.
| Your situation | Usually suits |
|---|---|
| Profit under about £50,000, all needed to live on | Sole trader |
| Profit in the higher-rate band, much of it left in the business | Limited company |
| Real risk of large claims or debts | Limited company, with insurance |
| Contractor whose clients require a company, outside IR35 | Limited company |
| Contractor inside IR35 | Umbrella employment is often simpler than running a company |
| Plans to take investors, give staff shares or sell | Limited company |
| Side business with small income | Sole trader, using the trading allowance |
For anything beyond the first row, speak to a tax adviser or an accountant in the United Kingdom, and to a corporate lawyer on shareholder agreements once there is more than one owner.
Frequently asked questions
Do you pay less tax as a limited company?
Not if you draw out all the profit. In 2026/27 a one-person company paying a £12,570 salary and dividends pays more than a sole trader at £30,000, £50,000 and £100,000 of profit. A company saves tax only on profit left in the business.
How much tax does a limited company pay on £100k profit?
On £100,000 of taxable profit, corporation tax is £22,750: 25% is £25,000, less marginal relief of 3/200 of £150,000. That is an effective rate of 22.75%, before any tax on dividends paid to the owner.
Is it better to pay yourself a salary or dividends?
Usually a mix. A salary of £12,570 uses the Personal Allowance and is deductible for corporation tax, even though a one-person company pays 15% employer National Insurance on the part above £5,000. Profit above that is normally taken as dividends.
When should I switch from sole trader to limited company?
When profit you can leave in the business, liability risk, or client demands justify the extra cost and admin. Income level alone no longer settles it: on 2026/27 rates, full extraction favours the sole trader even at £100,000 of profit.
Can a one-person limited company claim the Employment Allowance?
No, if the director is the only employee liable for employer National Insurance. The £10,500 allowance becomes available once the company also employs someone else whose pay attracts employer contributions.
Does Making Tax Digital apply to limited companies?
Not MTD for Income Tax, which covers sole traders and landlords. It applies from 6 April 2026 above £50,000 of qualifying income, from 6 April 2027 above £30,000 and from 6 April 2028 above £20,000.
Do I pay capital gains tax when I incorporate my business?
Not if incorporation relief applies. Transferring the whole business as a going concern for shares rolls the gain into the shares, but for transfers from 6 April 2026 you must claim the relief by the first anniversary of the following 31 January.
Sources
- HMRC, Income Tax rates and allowances: current and past (2026 to 2027): gov.uk
- GOV.UK, Self-employed National Insurance rates: gov.uk
- GOV.UK, Corporation Tax rates, expenses and reliefs: gov.uk
- HMRC, Company Taxation Manual CTM03910, Small profits rate: rates, limits and fractions: gov.uk
- HMRC, Rates and thresholds for employers 2026 to 2027 (updated 1 September 2026): gov.uk
- GOV.UK, Employment Allowance: check if you're eligible: gov.uk
- HMRC, Find out if and when you need to use Making Tax Digital for Income Tax (updated 26 March 2026): gov.uk
- HMRC, Understanding off-payroll working (IR35): gov.uk
- Taxation of Chargeable Gains Act 1992, section 162, as amended by Finance Act 2026, section 39: legislation.gov.uk
- HMRC, Budget 2026: overview of tax legislation and rates (updated 5 November 2026): gov.uk
About this article
This guide was researched and written by The Corporate INTL Newsroom, which covers cross-border legal, regulatory and business developments for lawyers, professional advisers and financiers in over 150 jurisdictions. Every rate and threshold has been checked against HMRC and GOV.UK guidance, the Budget 2026 tax overview and legislation.gov.uk, and the worked figures were recalculated independently. It is general information, not tax, legal or accounting advice; your own position depends on your income, family and plans, so take advice from a qualified adviser before changing structure. Last reviewed 6 November 2026. For more analysis like this, visit the Corporate INTL newsroom or subscribe to Corporate INTL.
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