Written and reviewed by James Whitfield · Updated for 2026/27 · Editorial standards · Methodology
Whether you are better off as a sole trader or limited company depends on your profits, other income, and how much you want to extract. This guide compares the tax position at three profit levels in 2026/27.
A sole trader pays income tax and NI directly on business profits through Self Assessment. There is no separation between the business and the individual. A limited company is a separate legal entity — it pays corporation tax on its profits, and the director/shareholder pays personal tax only on what they extract (salary and dividends).
The limited company structure creates planning opportunities because: you can control the timing and amount of personal extraction; corporation tax rates (19-25%) are lower than the combined income tax and NI rates on equivalent sole trader profits; dividends carry no NI; and retained profit can be left in the company to avoid personal tax until you choose to extract it.
However, running a limited company is more complex. You must file annual accounts at Companies House, submit a Corporation Tax return (CT600) to HMRC, and run a payroll for your salary. These administrative costs mean the financial advantage must be large enough to justify the overhead — typically this means profits of at least £25,000-£30,000 before the limited company route starts paying off meaningfully.
As a sole trader at £30,000 profit: income tax at 20% on £17,430 (profit minus £12,570 personal allowance) = £3,486. Class 4 NI at 6% on £17,430 = £1,046. Class 2 NI = £179. Total tax and NI: approximately £4,711. Take-home: £25,289.
As a limited company at £30,000 profit (director takes £12,570 salary, remaining £17,430 as dividends): employer NI on salary above £5,000 = 15% × £7,570 = £1,135.50. Taxable profit = £30,000 − £12,570 − £1,135.50 = £16,294.50. Corporation tax at 19% = £3,096. After-tax company profit = £13,198. Dividends paid = £13,198. First £500 tax-free, next £12,698 at 10.75% = £1,365. Total tax paid (employer NI + corp tax + dividend tax) = £1,135.50 + £3,096 + £1,365 = £5,597. Salary + dividends received = £12,570 + £13,198 = £25,768.
At £30,000 profit, the limited company produces slightly lower overall tax. The gap narrows once accountancy costs (typically £800-£1,500/year for a small company) are considered.
As a sole trader at £60,000: income tax at 20% on £37,700 (up to £50,270) + 40% on £9,730 = £7,540 + £3,892 = £11,432. Class 4 NI at 6% on £37,700 + 2% on £9,730 = £2,262 + £195 = £2,457. Class 2 NI = £179. Total: £14,068. Take-home: £45,932.
As a limited company at £60,000: director takes £12,570 salary (employer NI = £1,135.50). Remaining taxable profit = £46,294.50. Corporation tax at marginal rate (profits between £50,000 and £250,000): approximately 23% = £10,648. Post-tax profit = £35,647. Dividends £35,647: £500 tax-free, £37,200 space in basic rate band but only £35,147 dividends, taxed at 10.75% = £3,778. Total tax (employer NI + corp tax + dividend tax) = £1,135.50 + £10,648 + £3,778 = £15,561. But take-home = £12,570 salary + £35,647 dividends = £48,217.
At £60,000, the limited company still produces a better take-home, though the tax position is closer. The salary extraction into the personal allowance is free, and basic-rate dividends are taxed below the combined income tax + NI rate for sole traders.
The limited company advantage grows as profits increase, particularly for profits that would be taxed at the higher rate (40%) if taken as sole trader income. The combination of 25% corporation tax and 10.75% basic-rate dividend tax (effective total roughly 33%) is lower than 40% income tax alone — and it avoids the NI that sole traders pay on the same income.
If you can afford to leave money in the company — whether to invest, contribute to a pension, or extract over multiple years at lower rates — the advantage grows further. Retained profit is taxed only once (at corporation tax rates) and extracted when you choose.
For profits below £20,000-£25,000, the administrative cost of running a limited company often outweighs the tax saving. For profits above £50,000, the saving becomes material and the limited company route is worth considering seriously.
Generally, a limited company is more tax-efficient at profits above around £30,000. Below that, the administrative costs typically outweigh the saving. The benefit grows at higher profit levels.
The company pays employer NI on director salary above £5,000 (15% in 2026/27). Dividends carry no NI at all — this is a key efficiency advantage over sole trader profits, which are subject to Class 4 NI.
More administration: annual accounts, Corporation Tax return, payroll, Companies House filings. Accountancy fees of £800-£1,500/year are typical. Your accounts are also publicly visible on Companies House.
Most accountants suggest £25,000-£35,000 of profit as the point where limited company savings start to outweigh the additional administrative costs. The threshold depends on accountancy fees and how much of the profit you extract vs retain.