Sole Trader vs Limited Company: Which Is Better for Tax in 2026/27?
Comparing sole trader vs limited company tax at GBP 30k, GBP 60k and GBP 100k profit in 2026/27 -- the numbers may surprise you.
One of the most common questions for self-employed people in the UK is whether to operate as a sole trader or set up a limited company. The answer depends largely on profit level, personal circumstances and appetite for administrative complexity. In 2026/27, with corporation tax at up to 25% and income tax rates unchanged, the comparison is nuanced.
The Key Differences at a Glance
| Sole Trader | Limited Company | |
|---|---|---|
| Tax on profits | Income tax + NI | Corporation tax, then income tax on extraction |
| NI on profits | Class 4 at 6%/2% | No NI on retained profits |
| Personal Allowance | Yes (GBP 12,570) | Salary can use PA; dividends sit alongside |
| Admin | Simple Self Assessment | CT600, Companies House filings, accounts |
| Liability | Unlimited | Limited to share capital |
| IR35 exposure | None | Potentially yes |
How Sole Traders Are Taxed in 2026/27
A sole trader pays:
- Income tax on profits above the Personal Allowance (20% basic rate, 40% higher rate, 45% additional rate)
- Class 4 NI: 6% on profits GBP 12,570 to GBP 50,270; 2% above GBP 50,270
Note: Class 2 NI (a flat weekly charge) no longer applies as a mandatory payment for sole traders above the Small Profits Threshold following reforms effective from 2024/25.
How Limited Company Directors Are Taxed in 2026/27
The most tax-efficient extraction strategy for a director-shareholder typically involves:
- Salary up to the NI Secondary Threshold (GBP 5,000) -- no employer NI, no employee NI; the company gets a corporation tax deduction
- Additional salary to use the Personal Allowance (GBP 12,570) -- no income tax; company gets a CT deduction; technically triggers employer NI (15% on GBP 7,570 = GBP 1,135), though the Employment Allowance can offset this if eligible
- Remaining profits as dividends -- no NI; 8.75% dividend tax in the basic rate band; 33.75% in the higher rate band
The company pays corporation tax (19% up to GBP 50,000 profit; blended higher rate above) before distributing dividends.
Tax Comparison at Three Profit Levels
GBP 30,000 Profit
Sole trader:
- Income tax: (GBP 30,000 - GBP 12,570) x 20% = GBP 3,486
- Class 4 NI: (GBP 30,000 - GBP 12,570) x 6% = GBP 1,046
- Total tax and NI: GBP 4,532
- Net income: GBP 25,468
Limited company (salary GBP 12,570, dividend GBP 17,430 from post-CT profit):
- Company profit: GBP 30,000
- Less salary deduction: GBP 12,570
- Taxable profit: GBP 17,430
- CT at 19%: GBP 3,312
- Post-CT profit available as dividend: GBP 14,118
- Dividend tax: (GBP 14,118 - GBP 500) x 8.75% = GBP 1,191
- Director income tax on salary: GBP 0 (within PA)
- Employer NI on salary above GBP 5,000: GBP 1,135 (offset by Employment Allowance if eligible)
- Total tax (CT + dividend tax): GBP 4,503
At GBP 30,000, the difference is minimal -- the company saves around GBP 29 assuming the Employment Allowance is available. Administration costs (extra accountancy) typically outweigh any tax saving at this profit level.
GBP 60,000 Profit
Sole trader:
- Income tax: (GBP 50,270 - GBP 12,570) x 20% + (GBP 60,000 - GBP 50,270) x 40% = GBP 7,540 + GBP 3,892 = GBP 11,432
- Class 4 NI: (GBP 50,270 - GBP 12,570) x 6% + (GBP 60,000 - GBP 50,270) x 2% = GBP 2,262 + GBP 195 = GBP 2,457
- Total: GBP 13,889
- Net income: GBP 46,111
Limited company (salary GBP 12,570, remainder as dividends):
- Taxable profit after salary: GBP 47,430
- CT at 19%: GBP 9,012
- Post-CT dividends: GBP 38,418
- Dividend tax: (GBP 38,418 - GBP 500) x 8.75% = GBP 3,318
- Employer NI on salary above GBP 5,000: GBP 1,135 (assumed offset by EA)
- Total tax (CT + dividend tax): GBP 12,330
- Net income: GBP 47,670
At GBP 60,000, the limited company saves approximately GBP 1,559 per year. After accounting for extra accountancy costs of around GBP 1,000, the real-world saving is GBP 500-600.
GBP 100,000 Profit
Sole trader:
- Income tax at 20%, 40% and Personal Allowance taper effects: approximately GBP 32,460
- Class 4 NI: approximately GBP 3,179
- Total: approximately GBP 35,639
- Net income: approximately GBP 64,361
Limited company (salary GBP 12,570, remainder as dividends):
- Taxable profit after salary: GBP 87,430
- CT at 19% (small profits rate): GBP 16,612
- Post-CT dividends: GBP 70,818
- Dividend tax (split between basic and higher rate): approximately GBP 12,800
- Total tax: approximately GBP 29,412
- Net income: approximately GBP 70,588
At GBP 100,000 profit, the limited company saves approximately GBP 6,200 per year after admin costs -- a compelling difference that grows further at higher profit levels.
Non-Tax Factors to Consider
IR35
If you provide services through your company to a single client who controls your work, IR35 may reclassify your income as employment income -- eliminating the tax advantage entirely. Always assess IR35 risk before incorporating.
Admin Burden
A limited company requires annual accounts prepared to company law standards, a CT600 corporation tax return, confirmation statements at Companies House and potentially more complex VAT administration. Budget for GBP 800-GBP 2,000 extra in annual accountancy fees.
Access to Profits
Sole trader profits are immediately yours. Company profits are the company's money -- extracting them requires formal dividend declarations or salary payments. This matters for cash flow and mortgage applications (lenders typically look at salary plus dividends declared, not company profits).
Limited Liability
A limited company protects your personal assets from business creditors. For higher-risk businesses, this non-tax factor can be decisive regardless of tax considerations.
The Bottom Line
- Below GBP 30,000 profit: Sole trader is usually simpler and no worse on tax
- GBP 30,000-GBP 60,000: Company saves modest amounts; real-world saving after accountancy costs is GBP 0-GBP 1,500
- Above GBP 60,000: Limited company is clearly more tax-efficient; savings of GBP 2,000-GBP 8,000+ per year depending on profit level
Use our Sole Trader vs Limited Company calculator to run your own numbers for 2026/27 with pension contributions and other personal variables included.
Frequently asked questions
Is a limited company always more tax-efficient than a sole trader?
Not at lower profit levels. At GBP 30,000 profit, a sole trader and a director taking optimal salary plus dividends pay similar total tax. The company structure becomes noticeably more efficient above GBP 50,000-60,000 profit, and significantly so at GBP 80,000+.
What corporation tax rate applies to small limited companies in 2026/27?
Companies with profits up to GBP 50,000 pay corporation tax at 19% (small profits rate). Above GBP 250,000 the main rate of 25% applies. Between GBP 50,000 and GBP 250,000 a marginal relief taper applies, with an effective blended rate rising to 25%.
Does a sole trader pay National Insurance in 2026/27?
Yes. Sole traders pay Class 4 NI at 6% on profits between GBP 12,570 and GBP 50,270, and 2% on profits above GBP 50,270. Class 2 NI (GBP 3.45/week) was effectively abolished from 2024/25 for those with profits above the Small Profits Threshold.
What are the main non-tax disadvantages of a limited company?
Limited companies face more admin: annual accounts filed at Companies House, a corporation tax return, director responsibilities and more complex bookkeeping. Typical accountancy costs are GBP 800-GBP 2,000/year more than for a sole trader.
How does IR35 affect the sole trader vs limited company decision?
If you provide services through a limited company to a single client who controls how and when you work, IR35 may apply -- meaning HMRC treats the income as employment income, eliminating the tax advantage. Sole traders working directly for clients are not subject to IR35.
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