Sole Trader vs Limited Company 2026/27

UK sole trader vs limited company 2026/27 - Income Tax + NI vs Corporation Tax + dividends. Worked examples at £30k, £60k, £100k and £150k profit.

“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 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: 8.75%
  • Higher-rate dividend: 33.75%
  • 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:

  • Salary £12,570 (PA used, no IT; Class 1 NI at Primary Threshold means ~0 employee NI; employer NI: zero since company is director-only below ST)
  • Remaining profit £30,000 − £12,570 = £17,430
  • Corporation Tax at 19%: £17,430 × 19% = £3,312
  • Available as dividend: £17,430 − £3,312 = £14,118
  • Dividend tax: £500 allowance, then £13,618 × 8.75% = £1,192
  • Total tax: £3,312 + £1,192 = £4,504
  • Take-home: £25,496

Winner: limited company by £28/year. Barely matters — go with sole trader for admin simplicity.

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:

  • Salary £12,570 (as above)
  • Remaining profit £47,430
  • Corporation Tax (SPR 19% because profits ≤ £50,000): £47,430 × 19% = £9,012
  • Dividend available: £38,418
  • Dividend tax: £500 allowance, then (£37,700 − £12,570 − £500) × 8.75% + any higher rate portion…

Let me restate. Total income = £12,570 salary + £38,418 dividend = £50,988. Dividend is taxed at basic rate up to the £50,270 higher-rate threshold, then higher rate above.

  • Basic-rate dividend: £50,270 − £12,570 − £500 = £37,200 × 8.75% = £3,255
  • Higher-rate dividend: £38,418 − (£37,200 + £500) = £718 × 33.75% = £242
  • Total dividend tax: £3,497

Combined tax: £9,012 CT + £3,497 dividend = £12,509 Take-home: £47,491

Winner: limited company by £1,380/year. Meaningful but after Companies House fees, accountant, and time — maybe worth ~£800 net.

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:

  • Salary £12,570; dividend of £71,280 (after CT)
  • CT at 19% SPR up to £50k, then marginal relief for £50k-£100k band
  • Effective CT rate on £87,430: ~22.5% = £19,672 (approximate; exact marginal calc: 19% × £50,000 + 26.5% × £37,430 = £9,500 + £9,919 = £19,419)
  • Dividend available: £87,430 − £19,419 = £68,011
  • Dividend tax: basic rate portion + higher rate portion
    • Basic rate: (£50,270 − £12,570 − £500) × 8.75% = £3,255
    • Higher rate: (£68,011 − £37,200 − £500) × 33.75% = £30,311 × 33.75% = £10,230
    • Total: £13,485
  • Combined: £19,419 + £13,485 = £32,904
  • Take-home: £67,096

Winner: sole trader by £2,215/year at this income level. The marginal relief band + higher-rate dividend tax erodes the limited company advantage.

Example 4 — £150,000 annual profit

At £150k, marginal CT rate rises further, Personal Allowance tapers for the sole trader, and additional-rate dividend tax (39.35%) kicks in for the limited company above £125,140 total income.

Sole trader: Income Tax ~£49,432 + Class 4 ~£4,257 = £53,689 Limited company (salary + dividend): CT ~£32,419 + dividend tax ~£28,000 (est.) = £60,419

Winner: sole trader by ~£6,700/year.

The break-even (rough rule)

In 2026/27, pure tax savings from incorporation:

  • Below £30,000 profit: basically nil; sole trader wins on admin
  • £40,000 – £65,000: limited company wins by £500-£1,500/year
  • £65,000 – £100,000: limited company wins by £1,000-£1,500/year (but marginal relief erodes)
  • £100,000+: sole trader starts winning back due to PA taper + higher-rate dividend tax

This is the OPPOSITE of the pre-2024 picture, where limited companies won decisively at all profit levels above £30k. The 2024 Class 2 NI abolition for sole traders + the 25% main Corporation Tax rate + the slashed £500 Dividend Allowance combined to reshape the equation.

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
  • 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.

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