Choosing between sole trader and limited company is a tax and lifestyle decision. The right answer depends on your profit level, how much you need to extract, your pension plans and how much admin you want to take on. This guide gives a numerical comparison for 2026/27 across three profit levels, a breakdown of the NI difference, and a clear view of when switching becomes worthwhile.
Updated 2026/27 · LimitedCompanyTaxCalculator.co.uk · Editorial standards · Methodology
Income tax rates are the same for sole traders and limited company directors: 20% basic rate, 40% higher rate, 45% additional rate on income above the £12,570 personal allowance for 2026/27.
What differs is what counts as personal income. A sole trader's taxable profit flows directly into their Self Assessment return. A limited company director's personal income is only what they extract: salary plus dividends. Profit retained in the company is not personal income until it is distributed. For anyone who does not need to extract all profit immediately, that distinction is the core advantage of a limited company.
Dividend income is taxed differently to salary and self-employment income: 10.75% basic, 35.75% higher, 39.35% additional for 2026/27. These rates are lower than the equivalent income tax rates. That gap is the structural tax saving from extracting as dividends rather than salary.
NI is where the structural difference is most significant. Sole traders pay Class 4 NI at 9% on profits between £12,570 and £50,270, and 2% above £50,270. At £80,000 profit that is approximately £3,393 (9% × £37,700) plus £597 (2% × £29,730) = approximately £3,990.
A limited company director taking salary at or below £5,000 pays zero employee NI and the company pays zero employer NI. Dividends attract no NI. Total NI at any level of dividend extraction: £0.
A director at £12,570 salary incurs employer NI of £1,135.50 (15% × (£12,570 − £5,000)); this is covered in full by the Employment Allowance if the company is eligible (2+ payrolled employees). Employee NI at 8% applies above £12,570, so at exactly £12,570 salary, employee NI is also £0. Total NI: £1,135.50 employer NI only (or £0 with the Employment Allowance), versus approximately £3,990 Class 4 NI for the sole trader at £80,000. The director still saves substantially in NI.
A limited company pays corporation tax on its profits before any extraction. For 2026/27: 19% on profits up to £50,000; 25% above £250,000; marginal relief between £50,000 and £250,000, producing an effective rate that rises from 19% to 25%.
Corporation tax is often framed as the cost of the limited company structure. But the real comparison is not corporation tax versus no corporation tax. It is corporation tax plus lower-rate dividend extraction versus income tax plus Class 4 NI on the full profit. At most profit levels from £40,000 upwards, the dividend route produces a lower combined tax.
The marginal relief band (£50,000–£250,000) has a marginal rate of approximately 26.5% on the last pound of profit, higher than either boundary rate. Reducing profit within this band through pension contributions saves approximately 26.5p per pound in corporation tax with no NI cost.
Sole trader at £50,000 profit (England, 2026/27): income tax on £37,430 above personal allowance, £7,486. Class 4 NI: 9% × £37,700 = £3,393 (capped). Total tax: approximately £10,879. Net take-home: approximately £39,121.
Limited company at £50,000: director takes £12,570 salary. Employer NI: £1,139. Taxable profit: £50,000 − £12,570 − £1,139 = £36,291. Corporation tax at 19%: £6,895. Post-tax dividends: approximately £29,396. Director takes all as dividends. Total personal income: £41,966. Dividend tax: £500 allowance, then £28,896 at 10.75% = £3,106. Total tax: £11,140. Personal take-home: approximately £38,860.
The limited company saves approximately £317 at £50,000 profit. After the extra accountancy cost of £1,200–£2,000 per year, the sole trader is financially preferable at this level for most people. The break-even depends heavily on your accountancy fees.
Sole trader at £80,000 profit (England, 2026/27): income tax 20% on £37,700 = £7,540, plus 40% on £29,730 = £11,892. Total income tax: £19,432. Class 4 NI: 9% × £37,700 = £3,393, plus 2% × £29,730 = £595. Total NI: £3,988. Total tax: approximately £23,420. Net take-home: approximately £56,580.
Limited company at £80,000: director takes £12,570 salary, employer NI £1,139. Taxable profit: £66,291. Corporation tax at marginal relief: approximately £16,048. Post-tax dividends: approximately £50,243. Director takes £37,200 basic-rate dividends. Total personal income: £49,770. Dividend tax: 10.75% × £36,700 = £3,945. Total tax: £20,398. Personal take-home from current income: approximately £46,359. Retained: approximately £13,043.
If the director extracts all £50,243 as dividends, approximately £12,543 falls into the higher-rate band at 35.75% = £4,484 extra dividend tax. Full extraction take-home: approximately £57,671. Total combined tax: approximately £22,371. Compared to the sole trader's £23,420, the limited company saves approximately £1,049 on full extraction, and more if profit is partially retained.
Sole trader at £100,000 profit (England, 2026/27): income tax 20% on £37,700 = £7,540, plus 40% on £49,730 = £19,892. Total income tax: £27,432. Class 4 NI: 9% × £37,700 = £3,393, plus 2% × £49,730 = £995. Total NI: £4,388. Total tax: approximately £31,820. Net take-home: approximately £68,180.
Limited company at £100,000: director takes £12,570 salary, employer NI £1,139. Taxable profit: £86,291. Corporation tax at marginal relief: approximately £20,946. Post-tax dividends available: approximately £65,345. Director takes £37,200 basic-rate dividends. Dividend tax: £3,211. Total tax: approximately £25,296. Personal take-home from current income: approximately £46,359. Retained: approximately £28,145.
If the director takes all £65,345 as dividends, higher-rate dividend tax on approximately £28,145 at 35.75% = £10,062. Full extraction total tax: approximately £35,358. That is approximately £3,538 more than the sole trader at £100,000. But if you retain £28,145 in the company and extract it in a lower-income year, the total combined tax over time will be materially lower. Retained-profit flexibility is the defining advantage at this profit level.
As a rough guide, the tax saving from a limited company typically exceeds the extra accountancy cost at around £40,000–£50,000 in profit, but only clearly so above £60,000–£70,000. Below £40,000, the numbers rarely support incorporation on tax grounds alone.
The case for incorporating gets stronger when: (1) you do not need to extract all profit immediately; (2) you plan to make significant pension contributions via the company; (3) your profit is consistently above £60,000; or (4) commercial or contractual reasons require a company structure.
And the case against: extra admin and accountancy cost; the complexity of company accounts, payroll and Companies House filings; the discipline of separating personal and company finances; the loss of simplicity. These are real costs that tax calculations often understate.
Director pension contributions via a limited company carry a tax advantage that the sole trader comparison misses entirely. Employer pension contributions reduce company profit before corporation tax, attract no employer or employee NI, and do not count as personal income.
A director contributing £20,000 to a pension via the company saves approximately £4,600–£5,300 in corporation tax and avoids £3,000 in employer NI that would apply if the same amount were paid as salary. A sole trader making the same pension contribution gets basic rate income tax relief but still pays Class 4 NI on the full profit.
For directors planning to save seriously for retirement, this pension advantage can make the limited company worth it at profit levels where the pure extraction comparison is borderline.
No. Below roughly £40,000–£50,000 in profit, the combined taxes for a limited company often exceed the sole trader once actual extraction costs are modelled. The admin overhead reduces the advantage further. The limited company becomes genuinely more efficient at higher profits, especially when some profit is retained.
Class 4 NI at 9% on profits between £12,570 and £50,270, and 2% above £50,270. Class 2 NI is collected via Self Assessment. A director at or below £5,000 salary pays zero NI; at £12,570 the company pays employer NI of £1,135.50 (covered by the Employment Allowance if eligible).
Dividend tax rates are 10.75% basic, 35.75% higher and 39.35% additional. Income tax rates are 20% basic, 40% higher, 45% additional. That gap of roughly 11–12 percentage points at basic and higher rate is the structural saving from extracting as dividends rather than salary.
As a rough guide, seriously consider it at around £50,000–£60,000 in profit, if you do not need to extract everything immediately. Above £70,000–£80,000 the advantage is clearer. Below £40,000 the numbers rarely support incorporation on tax grounds alone.
Use SoleTraderTaxCalculator.co.uk for the sole trader figure and this calculator for the limited company. Enter the same profit on both. Keep pension, extraction level and other income identical. Compare personal take-home and total tax on identical inputs.
Yes. Limited liability protects personal assets. Some clients and public sector bodies require limited company status. A company may improve commercial credibility. These factors can tip the decision at profit levels where the tax comparison alone is marginal.
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.