There is no single answer that suits every business, because the right choice depends on your profit, on how much of it you need to draw and on what else matters to you. Use the calculator below to compare your 2026/27 take-home both ways, then read on for an explanation of the trade-offs. If you would rather talk it through, you will speak to us directly; we do not use a call centre.
Choosing between sole trader and limited company is one of the biggest decisions a business owner makes, and for 2026/27 it is more finely balanced than it has been for years. The Autumn Budget 2025 pushed dividend tax rates up by two percentage points from 6 April 2026, and a single-director company now pays 15% employer National Insurance on salary above £5,000. Both changes reduce the advantage a company used to have, so the old rules of thumb no longer quite hold.
None of this means that incorporating is a bad idea. For many owners it remains the more efficient route, and in any case the tax saving is only part of the picture, because limited liability, credibility with larger clients and tax-efficient pension contributions can matter far more than a few hundred pounds either way. For others, the extra administration, the loss of privacy and the cost of a second set of accounts outweigh any saving there might be.
This guide sets out both sides in plain terms, and every figure in it is the confirmed 2026/27 rate. When you are ready, the calculator gives you a like-for-like take-home comparison, and if you would prefer to talk it through with us instead, we are glad to do that.
Drag your annual profit and watch the take-home for each route, and the gap between them.
This calculator is an illustration using 2026/27 rates for England, Wales and Northern Ireland. It assumes a single-director limited company paying a £12,570 director's salary plus dividends, and it ignores pensions, student loans and any other income you may have. The company figure assumes you extract all remaining profit as dividends; if you can leave some profit in the company, the comparison shifts in the company's favour. Scottish income tax rates differ. The figures are a guide to comparing the two routes and should not be taken as personal advice, because your own position may change the answer. Before making a decision, take advice tailored to your circumstances; we are glad to provide it. Assumes a single-director company taking a £12,570 salary plus dividends.
Being a sole trader is the simplest way to run a business. You and the business are one and the same in the eyes of the law and HMRC, you pay income tax and Class 4 National Insurance on your profit, and you file one Self Assessment return a year. It is cheap to run and your finances stay private, but there is no separation between you and the business if things go wrong.
A limited company is a separate legal entity that owns the business. Your personal assets are generally protected, the company pays corporation tax on its profit (19% up to £50,000), and you typically pay yourself with a small salary plus dividends. It can be more tax-efficient at higher profits, especially if you do not need to draw every penny, but it costs more to run and your accounts go on the public record.
A sole trader pays income tax and Class 4 NI on all of their profit. In the basic-rate band that is a combined marginal rate of about 26% (20% tax plus 6% Class 4), and in the higher-rate band it is about 42% (40% plus 2%). The point to keep in mind is that this is paid on every pound of profit, whether you draw it or leave it in the business.
A company works in two layers. First the company pays corporation tax on its profit: 19% on the first £50,000, rising towards 25% between £50,000 and £250,000 (an effective marginal rate of around 26.5% in that band), and 25% above £250,000. Then, if you extract profit as dividends, there is a second tax on you personally at the dividend rates, after a £500 tax-free dividend allowance.
The efficient route is a small salary plus dividends. Our calculator assumes a £12,570 director's salary, which uses your full personal allowance and secures a state-pension qualifying year. The salary is deductible against corporation tax, and although a single-director company pays 15% employer NI on the slice above £5,000 (roughly £1,135), that NI is itself corporation-tax deductible and the relief on the salary more than offsets it, so the £12,570 level still comes out ahead of a lower £5,000 salary for most owners. For that reason we use it as the default in the calculator.
Two changes in 2026/27 have altered this picture. The basic and higher dividend rates each rose by 2 points on 6 April 2026, and employer NI is now 15% on salary above £5,000, with no Employment Allowance for a one-director company. Between them they have all but removed the take-home advantage of incorporating if you draw everything out. This year the case for a company rests mainly on being able to retain profit, on limited liability and on credibility, and much less on any tax saving on the money you extract.
You can switch from sole trader to limited company at any point, and there is no need to rush the decision. In 2026/27 the reason for switching is rarely a take-home saving on the profit you draw. More often it is that you want to start retaining and reinvesting profit, which is where the company's lower rate of tax makes a difference, that you need limited liability, or that a client requires a 'Ltd'.
The moments when it is worth looking at seriously are when you can leave profit in the business instead of drawing it all, when you want to fund a pension tax-efficiently through employer contributions, when you need the liability protection, or when a larger contract requires a limited company. Construction and trade businesses often incorporate early for the liability protection alone, and a good deal of our work is with businesses of that kind.
Timing matters for the practical steps as well. Incorporating part way through a year means a final sole-trader period and a first company period, transferring assets and goodwill, opening a business bank account, registering for corporation tax and PAYE, and moving over any VAT registration. None of it is difficult with help, but it needs to be planned so that nothing is missed.
Before you commit to anything, we will model the decision with your own figures so that you are working from real numbers. If incorporating later turns out not to have been the right choice, it is possible to return to being a sole trader. The decision remains yours, and our role is to make sure you understand the trade-offs before you make it.
See how we set companies upA company is a separate legal person, so your personal assets are generally protected if the business fails or is sued. For many owners, especially in higher-risk trades, it is the single most important reason to incorporate. Bear in mind that banks frequently ask directors for personal guarantees on company borrowing, and that directors can still be held liable for wrongful trading.
A sole trader keeps their finances private. A limited company must file accounts, director names and a registered office on the public Companies House register. From April 2028 small and micro companies will also have to file a profit and loss account, though they will be able to opt out of publishing it publicly.
A 'Ltd' can look more established and is sometimes required to win larger contracts or work with certain agencies. Companies can also raise money by issuing shares to bring in investors, which a sole trader cannot do. How much this matters varies a good deal by sector.
A company can make employer pension contributions that are deductible for corporation tax and paid before any extraction, sidestepping both dividend tax and NI. For a sole trader, business pension contributions are not a trading expense, so relief is given personally on contributions from post-tax income. For owners who want to fund a pension, this can tip the balance.
A sole trader files one Self Assessment return. A company must file annual accounts, a corporation tax return and a confirmation statement, run payroll for the director's salary, and follow company law on dividends. Expect £1,000 to £2,000+ a year more in accountancy fees, so the tax saving needs to be large enough to cover that cost before incorporating is worthwhile.
From 6 April 2026, sole traders and landlords with gross income over £50,000 must keep digital records and file quarterly updates plus a final declaration (the threshold drops to £30,000 in April 2027 and £20,000 in April 2028). Limited companies are not within MTD for Income Tax at all, since they file a CT600 instead, so incorporating avoids this particular compliance burden.
It can be, but not always. A company can be more efficient at higher profits because retained profit is taxed only at corporation tax (19% up to £50,000) instead of income tax plus Class 4 NI, and a salary-plus-dividends split lowers the combined rate. After the April 2026 dividend rise, and with 15% employer NI, the advantage is narrower than it used to be, and at lower profits the extra cost and admin often cancel out any saving. The calculator above will show you your own comparison.
It depends far more on whether you draw your profit or retain it than on any particular figure. If you draw most or all of what you earn in 2026/27, a sole trader generally stays a little ahead of a single-director company at almost every level of profit. The two run close to level in the high £50,000s, and the sole trader then pulls ahead again in the higher-rate band. Since 6 April 2026 dividend tax has been 2 points higher and employer NI is 15% with no Employment Allowance for a one-director company, so the old rule of thumb about incorporating to save tax no longer holds for money you extract. Where a company does come out ahead is on profit you leave in the business, which is taxed at 19% to 26.5% corporation tax with the dividend layer deferred. The calculator shows the draw-it-all comparison on your own figures.
There is no single number, because it depends entirely on your profit, how much you extract, your salary level and your other income. The saving is largest when you can leave profit in the company and defer the dividend tax; it can be small, negligible or even negative if you need to draw every pound at lower profit levels. We prefer to model it with your real numbers before you decide, instead of quoting a figure that might not apply to you.
No. A sole trader has unlimited personal liability, meaning your personal assets, including your home and savings, are exposed if the business runs up debts or is sued. Only a limited company gives you that legal separation, which is often the main non-tax reason people incorporate, especially in higher-risk trades.
Yes. A sole trader's finances stay private. A limited company has to file accounts and director details on the public Companies House register, which anyone can view. From April 2028 small companies will also need to file a profit and loss account, though they will be able to opt out of publishing it publicly.
For most single-director companies, a salary of £12,570 works well: it uses your full personal allowance with no income tax or employee NI, secures a state-pension qualifying year, and the corporation-tax relief on the salary outweighs the roughly £1,135 of employer NI on the slice above £5,000, so it still beats a lower £5,000 salary for most owners. Some owners prefer the £5,000 salary to avoid employer NI entirely, but for most the £12,570 level is the better default, and it is the one our calculator assumes.
For owners who want to fund a pension, the company is often the better route. A company can make employer pension contributions that are deductible for corporation tax and paid before extraction, avoiding both dividend tax and NI. A sole trader contributes from post-tax income with personal relief instead, and business contributions are not a trading expense. If funding a pension is a priority, that can tip the decision towards incorporating.
From 6 April 2026, yes if your gross income is over £50,000: you will need to keep digital records and file quarterly updates plus a final declaration. The threshold falls to over £30,000 from April 2027 and over £20,000 from April 2028. Limited companies are not in MTD for Income Tax, so incorporating avoids this particular burden.
Yes, and many people do once their profits grow. There is no need to rush; it is usually best to wait until the tax saving comfortably clears the extra running costs. Switching involves closing off your sole-trader period, transferring assets and goodwill, setting up the company for corporation tax and PAYE, and moving any VAT registration, and we will plan the sequence with you so that nothing is missed.
Expect £1,000 to £2,000+ a year more in accountancy fees than a sole trader, on top of the extra filings: annual accounts, a corporation tax return, a confirmation statement and payroll. Because that cost is ongoing, the tax saving needs to be large enough to justify incorporating. We agree our fees with you in advance, so you will know the cost before we start.
The calculator gives you the shape; a five-minute chat gives you the exact answer for your situation, and the plan to act on it.
