Sole Trader vs Limited Company 2026/27

“Should I go limited?” is the most common question from UK freelancers and contractors earning over £30,000/year. The answer in 2026/27 is more nuanced than it was pre-2024 — higher Corporation Tax for larger profits, a slashed Dividend Allowance, and the 2024 NI cuts for sole traders have narrowed the tax advantage of incorporation considerably. This guide walks through the maths for 2026/27, shows the break-even profit level, and covers the non-tax factors that matter.

Tax treatment — the fundamental difference

Sole trader (self-employed)

You and your business are the same entity tax-wise. All profit is personal income.

• Income Tax on profit above £12,570 Personal Allowance: 20% / 40% / 45% bands
• Class 4 NI on profit above £12,570: 6% up to £50,270, 2% above
• Class 2 NI: £3.65/week voluntary if profit below £7,105 Small Profits Threshold (SPT) (otherwise deemed paid)

Limited company

Separate legal entity. Profit goes through two tax layers:

• Corporation Tax on company profit: 19% on profits up to £50,000, 25% on profits above £250,000, marginal relief between (effective ~26.5% between the thresholds)
• Then you extract money personally via salary (taxed as PAYE) or dividends (taxed at dividend rates after the £500 Dividend Allowance)

2026/27 Corporation Tax

Unchanged from 2023 reform:

• Small profits rate (SPR): 19% on profits ≤ £50,000
• Main rate: 25% on profits > £250,000
• Marginal relief between £50,001 and £250,000: effective rate of ~26.5% on the marginal amount

Thresholds are divided between associated companies. If you run two limited companies with shared ownership, the £50k SPR threshold is halved.

2026/27 Dividend Tax

After deducting salary and Corporation Tax from profit, what’s left you can distribute as dividend.

• Dividend Allowance: £500 (reduced from £1,000 in 2023/24; now frozen)
• Basic-rate dividend: 10.75%
• Higher-rate dividend: 35.75%
• Additional-rate dividend: 39.35%

Dividends don’t attract National Insurance — this is the core mechanism that made limited companies tax-efficient historically.

Worked examples — £ for £ comparison

Standard setup for the limited company examples:

• Salary: £12,570 to use up the Personal Allowance (no Income Tax, minimal NI cost for director-only companies below Secondary Threshold)
• Dividend: balance of post-CT profit

Example 1 — £30,000 annual profit

Sole trader:

• Income Tax on £30,000 − £12,570 = £17,430 at 20% = £3,486
• Class 4 NI on £17,430 at 6% = £1,046
• Total tax + NI: £4,532
• Take-home: £25,468

Limited company (director salary £12,570, balance as dividends):

• Employer NI: the Secondary Threshold is £5,000, so (£12,570 − £5,000) × 15% = £1,136. A company whose only employee liable for secondary NI is its sole director cannot claim the Employment Allowance, so this is a real cost.
• Profit left for Corporation Tax: £30,000 − £12,570 − £1,136 = £16,295
• Corporation Tax at 19%: £3,096
• Available as dividend: £13,199
• Dividend tax: £500 allowance, then £12,699 × 10.75% = £1,365
• Total tax: £1,136 + £3,096 + £1,365 = £5,597
• Take-home: £24,403

Winner: sole trader by £1,065/year, before any accountant or filing costs.

Example 2 — £60,000 annual profit

Sole trader:

• Income Tax: (£50,270 − £12,570) × 20% + (£60,000 − £50,270) × 40% = £7,540 + £3,892 = £11,432
• Class 4 NI: £37,700 × 6% + £9,730 × 2% = £2,262 + £195 = £2,457
• Total: £13,889
• Take-home: £46,111

Limited company:

• Employer NI on the £12,570 salary: £1,136
• Profit left for Corporation Tax: £46,295
• Corporation Tax at 19% (small profits rate, profits under £50,000): £8,796
• Available as dividend: £37,499
• Dividend tax: £500 allowance, then £36,999 × 10.75% = £3,977. Total income is £12,570 + £37,499 = £50,069, just under the higher-rate threshold, so none of the dividend reaches 35.75%.
• Total tax: £1,136 + £8,796 + £3,977 = £13,909
• Take-home: £46,091

Winner: sole trader by £20/year - a dead heat on tax, and a clear loss for the company once filing and accountancy costs are added.

Example 3 — £100,000 annual profit

Sole trader:

• Income Tax: £7,540 (basic) + (£100,000 − £50,270) × 40% = £7,540 + £19,892 = £27,432
• Class 4 NI: £2,262 + (£100,000 − £50,270) × 2% = £2,262 + £995 = £3,257
• Total: £30,689
• Take-home: £69,311

Limited company:

• Employer NI on the £12,570 salary: £1,136
• Profit left for Corporation Tax: £86,295
• Corporation Tax with marginal relief: 19% on the first £50,000 (£9,500) plus 26.5% on the £36,295 above it (£9,618) = £19,118
• Available as dividend: £67,176
• Dividend tax: £500 allowance, then £37,200 at 10.75% (£3,999) and £29,476 at 35.75% (£10,539) = £14,538
• Total tax: £1,136 + £19,118 + £14,538 = £34,790
• Take-home: £65,210

Winner: sole trader by £4,102/year. The 26.5% marginal Corporation Tax band and higher-rate dividend tax stack on top of each other.

Example 4 — £150,000 annual profit

Sole trader:

• The Personal Allowance is fully tapered away above £125,140, so the whole £150,000 is taxable.
• Income Tax: £53,703
• Class 4 NI: £2,262 + (£150,000 − £50,270) × 2% = £4,257
• Total: £57,960
• Take-home: £92,040

Limited company:

• Employer NI on the £12,570 salary: £1,136
• Profit left for Corporation Tax: £136,295
• Corporation Tax: £9,500 + 26.5% on £86,295 (£22,868) = £32,368
• Available as dividend: £103,926
• Dividend tax: £500 allowance, then £37,200 at 10.75% and £66,226 at 35.75% = £27,675. Total income is £116,496, still below £125,140, so the 39.35% additional rate does not bite and the Personal Allowance survives intact.
• Total tax: £1,136 + £32,368 + £27,675 = £61,179
• Take-home: £88,821

Winner: sole trader by £3,219/year.

The break-even (rough rule)

In 2026/27, pure tax savings from incorporation: On the 2026/27 rates, incorporation does not win on tax at any of the profit levels modelled above:

• £30,000: sole trader ahead by about £1,065
• £60,000: level, within about £20
• £100,000: sole trader ahead by about £4,100
• £150,000: sole trader ahead by about £3,200

This is the reverse of the pre-2024 picture, where limited companies won decisively above roughly £30,000 of profit. Four changes moved it: Class 2 NI ceased to be mandatory for sole traders, the Class 4 main rate fell to 6%, the Dividend Allowance was cut to £500, and dividend rates rose to 10.75% and 35.75% from April 2026. The £5,000 Secondary Threshold matters too - a director’s salary now carries employer NI that a single-director company cannot offset with the Employment Allowance.

The tax case for incorporating is therefore weak on these figures. The reasons to incorporate are the non-tax ones below.

Non-tax factors that matter more than the savings

In favour of limited company

• Limited liability — business creditors can’t pursue your personal assets. Crucial for trades with risk exposure (construction, consulting for corporate clients, physical products).
• Client preference — many corporate / public-sector clients require a limited company for contracts (and IR35 off-payroll rules make sole-trader engagements awkward or impossible for “substitutable” work).
• Perceived credibility — not universal but some B2B buyers feel “Ltd” looks more established.
• Splitting income over tax years — ability to retain profit in the company and draw dividends across multiple years, smoothing tax bands.
• Pension contributions — company can make larger pension contributions to you as an expense (deductible from CT).

In favour of sole trader

• Admin simplicity — no Companies House filings, no separate accounts, no dividend paperwork, no IR35 concerns
• Cash flow — you pay tax once a year (plus payments on account); limited companies have Corporation Tax due 9 months after year-end + PAYE + possibly VAT on different cycles
• Accountant cost — sole trader basic accountant ~£300-£600/year; limited company accountant ~£800-£1,800/year
• Simpler exit / wind-down — stopping trading is just stopping; closing a limited company properly costs time/money (and any final share-capital distribution can trigger CGT — model the bill with the Capital Gains Tax calculator, including Business Asset Disposal Relief at 18% for 2026/27)
• No IR35 risk — off-payroll rules don’t apply to sole traders the same way

When to switch from sole trader to limited

Sensible triggers:

1. Crossed £50-60k profit AND likely to stay there or grow
2. Liability concern — significant risk of client claims or financial exposure
3. Major client / contract requires it — public-sector + large corporates often mandate
4. IR35 classification is ambiguous — outside-IR35 engagements through a PSC are cleaner contractually than direct sole-trader work in some cases
5. Partnering / bringing in investors — limited companies are the natural structure for equity splits

Don’t switch just for £500/year of marginal tax savings. The admin + accountant cost eats most of it.

Related tools & guides

• Self-employed tax calculator — Income Tax + Class 2 + Class 4 for sole trader modelling
• Contractor calculator — day-rate contractor inside vs outside IR35 take-home
• Dividend tax calculator — models the £500 allowance + 10.75% / 35.75% / 39.35% rates
• IR35 explained — off-payroll rules affecting limited-company contractors
• Self-Assessment 2026/27 — filing obligations for sole traders
• Capital Gains Tax calculator — disposal of shares, business assets, or property at exit