Choosing between a limited company and sole trader is not purely a tax question, even though that is what most people focus on. Admin burden, extraction strategy, retained profit flexibility, commercial considerations and long-term plans all matter. This guide gives a straight comparison across three profit levels, including the real-world admin costs that affect the actual outcome.
Written by James Whitfield · Updated August 2026 · Checked against 2026/27 HMRC rates · Editorial standards · Methodology
It depends on profit and how much you need to draw. A sole trader pays income tax and Class 4 NI (6%/2%) on all profit as it arises; a limited company pays 19-25% corporation tax, and you then pay dividend tax only on what you extract.
At £50,000 fully extracted the sole trader actually keeps slightly more (£40,268 vs £38,862). The company pulls ahead at higher profits, when you retain cash, or when you can split dividends with a shareholding spouse.
Take the same £50,000 profit through both structures, extracting everything. The sole trader pays income tax plus Class 4 NI; the company director pays corporation tax then dividend tax on a £12,570-salary split.
| Sole trader - income tax + Class 4 NI£7,486 income tax + £2,246 Class 4 at 6% | -£9,732 |
| Sole trader take-home | £40,268 |
| Limited company - corporation tax + dividend tax£6,896 corporation tax + £1,136 employer NI + £3,107 dividend tax | -£11,138 |
| Limited company take-home (full extraction) | £38,862 |
| Difference at £50k (full extraction) | Sole trader +£1,406 |
This surprises people: at £50,000, extracting every penny, the sole trader is actually a touch ahead. The limited company's edge is not the headline full-extraction take-home at this level - it is what you can do that a sole trader cannot. Retained profit sits in the company taxed only at 19% until you choose to draw it, so you can leave money in for a lower-income year, split dividends with a shareholding spouse, or fund a pension from pre-tax profit. The company pulls clearly ahead once profits are higher or you do not need to extract everything.
As a sole trader, income tax and Class 4 NI are calculated directly on your taxable profit. There is no legal separation between you and the business. If profit is £60,000, the tax calculation starts from £60,000 after allowable expenses.
As a limited company director, the company pays corporation tax first at 19–25%. You then extract income as salary and dividends. Salary is subject to income tax, employee NI and employer NI. Dividends are taxed at lower rates (10.75% basic, 35.75% higher) and carry no NI. The advantage exists because dividend tax rates are lower than income tax rates at equivalent levels, and NI does not apply to dividends.
But two costs eat into that advantage. First, the employer NI on the director salary. Second, the extra accountancy cost of running a limited company versus filing a sole trader Self Assessment return. The net benefit depends on profit level, extraction strategy and accountancy fees.
Sole trader at £40,000 profit (England): income tax approximately £5,486, Class 4 NI approximately £1,646. Total tax: approximately £7,132. Take-home: approximately £32,868. Effective rate: approximately 17.8%.
Limited company: director takes £12,570 salary. Employer NI: £1,139. Company taxable profit: £40,000 − £12,570 − £1,139 = £26,291. Corporation tax at 19%: approximately £4,995. Post-tax profit for dividends: approximately £21,296. Director takes all as dividends. Total personal income: £33,866. Dividend tax: £500 allowance, then £20,796 at 10.75% = £2,236. Total tax: approximately £8,370. Personal take-home: approximately £31,630.
At £40,000 profit the sole trader produces approximately £1,238 more in personal take-home than the limited company, before accounting for the extra accountancy cost (typically £1,000–£2,000 more per year). The limited company offers no financial advantage at this level when real costs are included. Admin simplicity strongly favours the sole trader here.
Sole trader at £60,000 profit (England): income tax approximately £13,432, Class 4 NI approximately £2,457. Total tax: approximately £15,889. Take-home: approximately £44,111. Effective rate: approximately 26.5%.
Limited company: director takes £12,570 salary. Employer NI: £1,139. Taxable profit: £60,000 − £12,570 − £1,139 = £46,291. Corporation tax at 19%: approximately £8,795. Post-tax profit for dividends: approximately £37,496. Director takes all as dividends. Personal income: £12,570 + £37,496 = £50,066. Dividend tax: £500 allowance, then £36,996 at 10.75% = £3,977. Total tax: approximately £13,911. Personal take-home: approximately £46,089.
The limited company produces approximately £1,978 more in personal take-home at £60,000. Whether that outweighs the extra accountancy cost depends on your situation. The numbers are close to neutral for many directors. This is the profit range where the question starts to be genuinely worth analysing, especially if you do not need to extract everything each year.
Sole trader at £100,000 profit (England): income tax about £27,432, Class 4 NI about £3,257. Total tax: about £30,689. Take-home: about £69,311. Effective rate: about 30.7%.
Limited company: director takes £12,570 salary, employer NI £1,139. Taxable profit: approximately £86,291. Corporation tax at marginal relief: approximately £20,946. Post-tax profit for dividends: approximately £65,345. Director takes £37,700 in dividends (to stay in the basic rate band). Total personal income: £50,270. Dividend tax: approximately £3,997. Personal take-home: approximately £46,273. Retained in company: approximately £27,645.
If the director takes all available profit as dividends, approximately £16,660 falls into the higher-rate band at 35.75%, adding approximately £5,956 in dividend tax. Full extraction take-home: approximately £57,662. Combined total tax: approximately £42,338. That is roughly £9,729 more than the sole trader. But if you only need £46,273 personally and leave £27,645 in the company (already taxed at corporation tax rates), the total tax over time looks quite different. Retained-profit flexibility is the defining advantage at this profit level.
Sole trader admin is straightforward: register as self-employed with HMRC, file an annual Self Assessment return, pay tax on time and keep business records. No Companies House filings, no company accounts, no payroll in most cases.
A limited company requires annual confirmation statements and accounts at Companies House, a corporation tax return, a PAYE payroll for the director salary, and consistent separation of company and personal finances. The additional accountancy cost is typically £1,000–£2,000 per year versus a straightforward sole trader arrangement.
Non-tax factors matter too. Some clients and public sector contracts require limited company status. A company may improve commercial credibility with certain clients or lenders. Limited liability protects personal assets if the business faces claims. Sole traders are personally liable. These factors can tip the decision at any profit level.
No. Below roughly £50,000 in profit, the combined taxes for a limited company often exceed the sole trader when you model the actual extraction costs. The admin overhead reduces the advantage further. The limited company becomes genuinely more efficient at higher profits, especially when you retain some profit rather than extracting everything.
As a rough guide, the tax saving from a limited company typically exceeds the extra accountancy cost at around £50,000–£60,000 in profit. Below that the numbers are close and the extra admin often outweighs the saving. Above £70,000–£80,000 the tax advantage is clearer, especially when you do not need to extract everything immediately.
Use SoleTraderTaxCalculator.co.uk for the sole trader figure and this calculator for the limited company. Enter the same profit on both. Keep pension, other income and extraction level identical. Compare personal take-home and total tax at identical inputs.
Yes. The steps involve registering a new company, transferring contracts where needed, setting up PAYE and ceasing sole trader activity. An accountant can plan the transition to minimise tax disruption and manage any overlap between tax years.
The rates and rules on this page are drawn from the official UK government sources below, using the confirmed 2026/27 figures. Each link opens the relevant HMRC, GOV.UK or Companies House page in a new tab.
The limited company tax calculator turns this guidance into a concrete estimate for corporation tax, dividends and personal take-home, based on 2026/27 HMRC rates.