The question of whether to stay self-employed or incorporate as a limited company is one of the most common structural decisions for growing sole traders. The comparison involves more than a headline tax rate. Administration, extraction strategy, retained profit, pension planning and long-term commercial plans all feed into an honest answer.
Written and reviewed by James Whitfield · Updated October 2026 · Checked against 2026/27 HMRC rates · Editorial standards · Methodology
On 2026/27 rates the sole-trader-versus-company decision is much closer than it used to be. With dividend tax now 10.75% at the basic rate, this site's own comparison shows a sole trader keeping more than a fully-extracting limited company at £30,000, £50,000 and £80,000 of profit in the illustrated scenarios (sole director, £12,570 salary, the rest paid out as dividends, no Employment Allowance, no other income), once a typical £1,200 accountancy fee is included.34 A company can still win — but the gains now come from retaining profit in the company, company pension contributions and commercial factors, not from a simple extract-everything saving. Run your own numbers before incorporating.
Related: Drawings vs salary and dividends
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As a sole trader, income tax and Class 4 National Insurance are calculated directly on your taxable profit. There is no legal separation between you and the business. Profit is yours, and your personal tax bill follows from it at personal income tax rates.
As a limited company director, the company pays corporation tax on its profits — currently 19% on profits up to £50,000, 25% on profits above £250,000, with marginal relief in between. You then extract income personally as a combination of director 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 for 2026/27) and are not subject to National Insurance, but they are paid from post-corporation-tax profit.
The advantage of a limited company is that dividend tax rates are lower than income tax rates at equivalent levels, and NI does not apply to dividends. The practical reality is more complex: employer NI on the salary, corporation tax on profits, and additional filing obligations all reduce the theoretical saving. The net benefit depends heavily on profit level, extraction pattern and admin cost.
Here is where the old received wisdom needs updating. Under the dividend rates that applied a few years ago, a company taking a small salary and the rest as dividends often beat sole trader status comfortably from around £40,000–£50,000. The 2026/27 dividend rates — 10.75% basic, 35.75% higher — are materially higher, and once corporation tax and a typical £1,200 accountancy fee are stacked on, the extract-everything saving has largely gone. This site's own Ltd-vs-sole comparison bears that out.
| £30,000 profit — sole £25,468 vs company £23,203 | Sole ahead ~£2,265 |
| £50,000 profit — sole £40,268 vs company £37,662 | Sole ahead ~£2,606 |
| £80,000 profit — sole £57,711 vs company £54,565 | Sole ahead ~£3,147 |
That does not mean a company never wins. Change the assumptions and the answer moves: if you do not need to extract every pound, retaining profit in the company (taxed only at corporation tax) can defer or reduce personal tax; company pension contributions are highly efficient; and some contracts simply require a limited company. But on a like-for-like, take-it-all-out basis at 2026/27 rates, incorporation is no longer the near-automatic saving it once was — and anyone quoting the old '£2,000+ saving from £50k' figure is working from out-of-date dividend rates.
A sole trader's administrative requirements are relatively light. Register with HMRC as self-employed, file a Self Assessment return each year, pay tax by the relevant deadlines, and keep business records. No Companies House involvement, no company accounts, no separate payroll in most cases.
A limited company requires: registration at Companies House; annual confirmation statements; annual company accounts prepared to the required standard (including a balance sheet, profit and loss account and notes); a corporation tax return; a PAYE payroll for the director salary; and consistent separation of company money from personal finances.
The additional accounting cost of running a limited company — versus a sole trader arrangement — is typically £1,000–£2,000 per year depending on the complexity of the business and the accountant. That cost needs to be factored into the comparison. Incorporating to save £500 in tax while incurring £1,500 in extra fees is not a saving.
Retained company cash is one of the most powerful features of a limited company that sole trader comparisons often overlook. If you do not need to extract every pound of profit personally, the company can retain it after paying corporation tax, reinvest it or extract it later — potentially at a more favourable personal tax rate.
Director pension contributions are made by the company rather than personally. They reduce company profit before corporation tax and are not subject to National Insurance, making them highly efficient for directors at higher profit levels. The same amount contributed to a pension via a limited company costs less in total tax than an equivalent personal pension contribution as a sole trader.
Some clients and public sector contracts require limited company status. If the work you are targeting effectively requires a company, the tax comparison becomes secondary — the structure decision is commercially driven.
Use LimitedCompanyTaxCalculator.co.uk with the same underlying profit assumption used on this site. Enter expected company profit (before director salary), set a salary and dividend level, and compare personal take-home and retained cash against the sole trader result here.
Keep the commercial assumptions identical: same profit, same pension, same other income. Change only the structure. That way the comparison reflects a genuine structural difference rather than comparing two different businesses.
If you are seriously considering incorporating, discuss it with a qualified accountant before acting. The comparison looks different depending on your extraction needs, pension plans, household income requirements and whether you have a trusted accountant who can manage the additional compliance efficiently.
Thinking of going limited? Compare first: with 2026/27 rates, a sole trader who takes all the profit out usually keeps more. If you already run a company, the Director's Pay & Tax Pack (£4.99) covers salary versus dividends, the director's loan account and year-end planning for 2026/27.
No. It depends on profit level, extraction pattern, admin cost, retained profit plans and wider personal income. At lower profit levels the additional admin cost often outweighs any tax saving.
On 2026/27 rates, later than most old guidance suggests. Because dividend tax rose to 10.75% at the basic rate, a fully-extracting company no longer beats sole trader status at £50,000–£80,000 once accountancy fees are counted — this site's comparison shows the sole trader ahead across that range. Incorporation is now mainly worth considering when you can retain profit in the company rather than draw it all, when you want to make company pension contributions, or when a contract requires a limited company. Run your own figures rather than relying on a rule of thumb.
Use the same profit assumption on both sites. Use LimitedCompanyTaxCalculator.co.uk for the company side and this site for the sole trader baseline. Compare personal take-home and total tax on identical commercial inputs.
Yes. There are practical considerations around timing, transferring contracts and registering the company before ceasing sole trader activity. An accountant can help plan the transition to minimise disruption and ensure the correct treatment of any overlap period.
Dividend tax rates have risen. A few years ago basic-rate dividends were taxed at 7.5%, then 8.75%; for 2026/27 the rate is 10.75%, with the higher rate at 35.75%. Dividends are also paid out of profit that has already borne corporation tax. Each rise narrows the gap between extracting company profit as dividends and simply being taxed as a sole trader. Combined with a typical £1,200-plus accountancy fee, that is why the extract-everything saving has largely disappeared at the profit levels where it used to be obvious.
The rates, thresholds and rules in this guide are drawn from the official HMRC and GOV.UK sources below, using the confirmed 2026/27 figures. Each link opens the relevant official page in a new tab.
The sole trader tax calculator turns this guidance into a concrete monthly take-home and tax reserve estimate, based on 2026/27 HMRC rates. Enter taxable profit — not turnover.