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.
Related reading
Sole Trader vs Limited Company UK 2026 — Which Saves More Tax at Your Income Level?
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The AIA lets businesses deduct the full cost of qualifying plant and machinery up to GBP 1 million in the year of purchase. Here is how it works in 2026/27.
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