Sole trader or limited company: which is better in 2026/27?

On tax alone, for a one-person business taking all its profit as income, being a sole trader now beats a limited company at almost every level of profit. That is a reversal of the previous situation, and is a recent one.

Under 2025/26 rates a limited company paid less total tax than a sole trader, but only between roughly £55,500 and £70,250 of profit, and even at the best point in that range the saving was £759 a year. The dividend rate rise on 6 April 2026 all but closed that range. It now runs from about £60,150 to £60,500, and the maximum saving inside it is £15 a year.

That does not mean nobody should incorporate. It means the tax argument has largely gone, so the decision whether to be a limited company now turns on the things that were always more important: liability, whether you need all the profit as cash, whether you employ anyone, and how your customers buy. This guide works through the current numbers and then the factors that actually decide it.

The short answer

• Taking all profit as income, one director, no staff: sole trader wins at essentially every profit level in 2026/27.
• You employ someone besides yourself: a company is ahead between roughly £54,400 and £66,900 of profit, worth up to about £674 a year, because the Employment Allowance removes the employer National Insurance cost.
• You do not need all the profit: a company is meaningfully better, because retained profit is taxed at 19% or 25% rather than at your marginal income tax rate. This is now the main tax case for incorporating.
• Everything else: limited liability, credibility with larger customers, raising investment and protecting the name are reasons to incorporate that have nothing to do with tax, and they are usually the ones that matter.

Why the comparison you will read elsewhere is out of date

Dividend tax rates rose by two percentage points on 6 April 2026. The basic rate went from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%. The additional rate is unchanged at 39.35%, and the dividend allowance stays at £500.

Two percentage points sounds minor. It is not, because the small-salary-plus-dividends model depends on a thin margin. Everything else in the calculation had already moved against companies: employer National Insurance is 15% on earnings above a secondary threshold of just £5,000, and a company whose only employee is its sole director cannot claim the £10,500 Employment Allowance to offset it.

Here is the same calculation at both years’ dividend rates, with nothing else changed.

Profit before owner’s pay	Company net, 2025/26 rates	Company net, 2026/27 rates	Worse by
£30,000	£24,657	£24,403	£254
£60,000	£46,831	£46,091	£740
£100,000	£66,543	£65,210	£1,334
£150,000	£90,890	£88,821	£2,069

 

And here is what that does to the decision and demonstrates the band of profit where a limited company beats a sole trader:

	Company ahead between	Width of the window	Best case advantage
2025/26 rates	£55,480 and £70,250	£14,770	£759 a year
2026/27 rates	£60,150 and £60,500	£350	£15 a year

 

The window did not shift. It closed, by around 98%. For a sole director extracting all profit, there is now no profit level at which incorporating produces a tax saving worth having.

The full comparison for 2026/27

Assumptions, stated so you can check them: a single-director company with no other employees, so no Employment Allowance; a £12,570 salary with the balance drawn as dividends; all post-tax profit extracted; and no other income. Sole trader figures are income tax plus Class 4 National Insurance.

Profit before owner’s pay	Sole trader take-home	Limited company take-home	Difference
£20,000	£18,068	£17,174	Sole trader ahead by £894
£30,000	£25,468	£24,403	Sole trader ahead by £1,065
£40,000	£32,868	£31,633	Sole trader ahead by £1,235
£50,000	£40,268	£38,862	Sole trader ahead by £1,406
£60,000	£46,111	£46,091	Level, £20
£70,000	£51,911	£51,042	Sole trader ahead by £869
£80,000	£57,711	£55,765	Sole trader ahead by £1,947
£100,000	£69,311	£65,210	Sole trader ahead by £4,102
£150,000	£94,554	£88,821	Sole trader ahead by £5,733
£200,000	£121,054	£111,422	Sole trader ahead by £9,633

 

Two features of this are worth noticing. The gap narrows to almost nothing around £60,000, which is the remnant of the old crossover. And it then widens steadily, because above £50,000 of company profit corporation tax runs at an effective marginal 26.5% under marginal relief, while the dividends coming out are taxed at 35.75%.

Why the numbers land there

The sole trader pays income tax at 20%, 40% and 45%, plus Class 4 National Insurance at 6% between £12,570 and £50,270 and 2% above that. Class 2 stopped being a compulsory charge in April 2024, so above the small profits threshold the National Insurance credit comes automatically.

The company pays corporation tax at 19% on profits up to £50,000, an effective 26.5% between £50,000 and £250,000 under marginal relief, and 25% above £250,000. On top of that it pays 15% employer National Insurance on the salary above £5,000, and then the director pays dividend tax on whatever is left. Three layers instead of one.

On the optimal salary

£12,570 is the optimal salary in this model, and it holds at every profit level from £30,000 to £150,000.

The reason is that salary within the personal allowance is efficient. Each extra pound of salary costs the company 15p in employer National Insurance but saves 19p of corporation tax, and reaches the director untaxed while it sits inside the personal allowance. Above £12,570 the position reverses hard, because it then attracts 20% income tax and 8% employee National Insurance as well as the 15% employer charge, which is far worse than taking it as a dividend.

Where a limited company still wins

Three situations where and limited company still wins, and the second is the most important one.

1. If you employ someone other than yourself

The Employment Allowance is worth £10,500 against employer National Insurance, but a company whose only employee paid above the secondary threshold is its sole director cannot claim it. Take on one other employee and it becomes available, which removes the employer National Insurance cost from the director’s salary.

That changes the answer:

Profit	Sole trader	Company with Employment Allowance	Difference
£30,000	£25,468	£25,224	Sole trader ahead by £244
£60,000	£46,111	£46,733	Company ahead by £621
£100,000	£69,311	£65,746	Sole trader ahead by £3,566
£150,000	£94,554	£89,358	Sole trader ahead by £5,197

 

So with staff, the company window reopens across roughly £54,400 to £66,900 of profit, worth up to about £674 a year. Still modest, and still gone above about £67,000.

2. If you do not need all the profit as cash

This is now the strongest tax argument for incorporating, and it is the one the old comparisons bury.

Money left inside a company is taxed once, at 19% or 25%. Money drawn out is taxed again as a dividend. So if you are reinvesting, building a cash reserve, or simply do not need the income this year, the company is materially better – because the second layer of tax never happens.

At £100,000 of profit:

	Cash in your hand	Left in the company	Total tax
Sole trader	£69,311	Nothing, it is all taxed on you	£30,689
Company, extract everything	£65,210	£0	£34,790
Company, retain £20,000	£52,360	£20,000	£27,640
Company, retain £40,000	£36,879	£40,000	£23,121
Company, retain £60,000	£19,029	£60,000	£20,971

 

Retaining £40,000 cuts the total tax bill from £30,689 to £23,121 – a saving of £7,568 in that year. The trade-off is real: that £40,000 is the company’s money, not yours, and drawing it later will trigger dividend tax then. But if it is going back into the business, or funding a pension contribution, or building a buffer, the sole trader has no equivalent option. Every pound of a sole trader’s profit is taxed on them in the year it is earned, whether they take it or not.

That last point deserves emphasis, because it is the single most under-appreciated difference between the two structures.

3. The reasons that have nothing to do with tax

• Limited liability. A sole trader’s business debts are their personal debts. A company is a separate legal person. Not absolute – personal guarantees, overdrawn director’s loan accounts and wrongful trading all cut through it – but it is a genuine protection and for some trades it is decisive.
• Credibility and procurement. Some larger customers and public sector buyers will only contract with incorporated suppliers, or ask for accounts they can inspect. If that describes your market, the decision is made for you.
• Raising investment. You cannot sell shares in a sole trade. If you intend to bring in investors or issue equity to key people, you need a company.
• Name protection. A company name is protected on the register. A sole trader’s trading name is not, and the only protection available is a trade mark.
• Pension contributions. Employer pension contributions are a deductible company expense and avoid both layers of tax, which can be a more efficient route than a personal contribution from drawn income.

 

What the old argument gets wrong

You will still see the claim that a company is better because corporation tax is 19% against 20% for income tax. It is wrong for three reasons.

It compares one tax to one tax. Corporation tax is not the end of the story: getting the money out of the company costs dividend tax on top, and getting it out as salary costs employer and employee National Insurance too.

It uses the wrong corporation tax rate. 19% applies only up to £50,000 of profit. Between £50,000 and £250,000 the effective marginal rate is 26.5%, which is above the 20% basic rate of income tax it is being compared with.

And it ignores National Insurance, which is where much of the difference actually sits. A sole trader pays Class 4 at 6% then 2%. A company pays employer National Insurance at 15% on salary above £5,000. Leaving that out flatters the company substantially.

Admin, cost and compliance

Tax is not the only ongoing difference.

	Sole trader	Limited company
Registration	Register for Self Assessment, no fee	Incorporate at Companies House, £50 online
Annual filing	One Self Assessment return	Annual accounts, confirmation statement, Company Tax Return
Accounts on public record	No	Yes
Audit	Never	Only above the small company thresholds
Deadlines	31 January	Accounts 9 months after year end, tax return 12 months, tax due 9 months and a day
Late filing penalty	£100 initial	£150 rising to £1,500, doubled for two consecutive late years
Accountancy cost	Lower	Higher, because there is more to file
Making Tax Digital	In scope. Quarterly updates from April 2026 above £50,000 of qualifying income, April 2027 above £30,000, April 2028 above £20,000	Not in scope for MTD for Income Tax

 

Two of those go against the usual assumption that companies always carry more admin. Making Tax Digital for Income Tax applies to sole traders and landlords, not companies, so a sole trader above the threshold now files four quarterly updates plus a return, while a company director files an annual set of accounts. And on privacy, the gap narrows in 2028: small companies and micro-entities will have to file a profit and loss account, though the Government has said they will be able to opt out of having it published on the public register.

Switching from sole trader to limited company

If you decide to change, the sequence is: choose and check the company name, incorporate at Companies House, tell HMRC and register the company for corporation tax, set up a business bank account in the company’s name, move contracts and insurance across, register for PAYE if you will take a salary, and deregister from Self Assessment as self-employed once the trade has ceased.

Two things to get advice on rather than guess at. Transferring the business into the company is a disposal of assets, which can have capital gains and goodwill consequences, and there are reliefs that may or may not apply. And if you are VAT registered, decide whether to transfer the registration or start a new one.

You can also go the other way. Disincorporating is more complicated and more expensive than incorporating, so it is worth not incorporating on thin tax grounds in the first place.

So which should you choose?

Choose sole trader if you are starting out, you take most of the profit as income, you do not employ anyone, your customers do not require an incorporated supplier, and your trade does not carry unusual liability risk. On current rates you will also keep more of your money.

Choose a limited company if you need limited liability, you are reinvesting rather than drawing profit, you employ people, you intend to raise investment, or your market expects it. Not because of the tax on extracted income, which no longer favours it.

Get advice if your profits are above about £100,000, you have other income sources, you are considering a mixed structure, or you are weighing a transfer of an existing business. The figures here model one specific case, and the answer moves once there is other income, a spouse or partner as a second shareholder, or significant pension planning in play.

Frequently asked questions

Can one person set up a limited company?

Yes. A private limited company needs only one director and one shareholder, and the same person can be both. The minimum age is 16, the person must not be a disqualified director, and the company needs a registered office address in the UK. A disqualified director can apply to court under Section 17 of the CDDA 1986 for specific permission to act as a director or form a particular company, but the courts only grant these in rare, well-evidenced cases.

Is a sole trader or a limited company better for tax in 2026/27?

For a one-person business taking all its profit out as income, the sole trader is better at almost every level of profit. The dividend rate rise on 6 April 2026 closed the narrow band of profit in which a company used to win.

Can I change from sole trader to limited company later?

Yes, and most people who incorporate do it this way rather than starting as a company. You register the company at Companies House, transfer the trade and any assets into it, and tell HMRC that the sole trade has ceased.

Does a limited company pay less tax than a sole trader?

Not usually, once the money is taken out. Corporation tax is only the first layer: extracting profit as dividends adds dividend tax on top, and extracting it as salary adds employer and employee National Insurance.

Do I need an accountant for a limited company?

It is not a legal requirement, but a company has more filing obligations than a sole trader: annual accounts at Companies House, a corporation tax return, and a confirmation statement. Most one-person companies use one.

In summary

The tax case for incorporating a one-person business has essentially closed. At 2026/27 rates a sole trader keeps more at every profit level from £20,000 to £200,000, once all profit is extracted, and the range of profit in which a company used to win has narrowed from about £14,750 wide to £350 wide, with the best saving inside it falling from £759 a year to £15. Anyone telling you otherwise is running pre-April 2026 dividend rates.

What survives is more interesting. If you can leave profit in the business, a company still saves real money – £7,568 in a single year on £100,000 of profit with £40,000 retained. And if you need limited liability, or your customers require a company, the tax question was never the deciding one anyway. Work out which of those describes you, and the structure follows.

Figures here are for 2026/27, assume a single director with no other income, and are illustrations rather than advice. Run your own numbers or have an accountant run them before you act.