Comparison · Business & Self-Employment · 2026
Sole Trader vs Limited Company 2026: Which Is Cheaper?
It is the question every growing business eventually asks: stay a sole trader, or incorporate? A sole trader pays income tax and Class 4 National Insurance on every pound of profit, simply. A limited company pays corporation tax first, then the director draws a small salary plus dividends — now taxed at 10.75%, 35.75% and 39.35% in 2026/27. The company can win big at higher profits, but only once the tax saving outweighs the extra cost and admin. This comparison maps the tax crossover point, the National Insurance picture and the real administrative burden, with worked examples at £30k, £60k and £100k of profit.
TL;DR — 30-Second Summary
- • Low profit: sole trader usually wins once admin cost is counted
- • Higher profit: the company often wins on tax — corporation tax plus light dividend rates beat income tax + Class 4 NI
- • National Insurance: dividends carry no NI; sole traders pay Class 4 at 6%/2%
- • Admin: the company is far more work — accounts, CT return, payroll, public filings
How Each Is Taxed
- • Income tax 20%/40%/45% on all profit
- • Class 4 NI: 6% to £50,270, then 2%
- • Taxed on profit whether drawn or not
- • One Self Assessment return
- • No public filings
- • Corporation tax 19% (to £50k) → 25% (over £250k)
- • Director: small salary + dividends
- • Dividends 10.75%/35.75%/39.35% (£500 allowance)
- • No NI on dividends; can retain profit
- • Accounts, CT return, payroll, public filings
The New Dividend Rates Matter
The dividend rates rose for 2026/27 to 10.75% (basic), 35.75% (higher) and 39.35% (additional), with the dividend allowance at just £500. Because the company has already paid corporation tax on the profit before it can be paid as a dividend, the real comparison is corporation tax plus dividend tax against the sole trader's income tax plus Class 4 NI.
The higher dividend rates have narrowed the company advantage compared with a few years ago — but the absence of National Insurance on dividends and the ability to retain profit still tip the balance to the company at higher profit levels. Model both with the dividend tax calculator and the corporation tax calculator.
The National Insurance Picture
National Insurance is often the deciding factor. A sole trader pays Class 4 NI at 6% on profits up to £50,270 and 2% above. A director taking dividends pays no NI on dividends at all, and by keeping salary low avoids most employee and employer NI.
The company does pay 15% employer NI on salary above the £5,000 secondary threshold, which is why directors usually set a modest salary and take the rest as dividends. This NI gap is a core reason the company pulls ahead as profits rise.
Worked Examples
Approximate total tax and NI on the business profit, assuming the company director extracts all available profit as a small salary plus dividends. Figures are illustrative for 2026/27 and before company admin costs:
| Profit | Sole trader (tax + Class 4 NI) | Company (CT + dividend tax) | Better (before admin) |
|---|---|---|---|
| £30,000 | ~£4,800 | ~£4,700 | Roughly level → sole trader once admin counted |
| £60,000 | ~£15,400 | ~£13,500 | Company |
| £100,000 | ~£29,500 | ~£26,000 | Company |
The pattern: at £30,000 the two are close enough that the company's admin cost usually tips it back to the sole trader; by £60,000 and above the company's lower NI and lighter dividend rates create a clear saving, growing with profit — and the ability to leave profit in the company to draw in a lower-income year adds further flexibility. Run your figures with the dividend vs salary comparison.
The Admin Trade-Off
Tax is only half the story. A company means annual accounts and a confirmation statement at Companies House, a corporation tax return, payroll for any salary, statutory records, public disclosure of company information, and the director's own Self Assessment for dividends. That typically adds £1,000–£2,000 a year in accountancy fees and a real time cost. A sole trader files one return and keeps records. The admin is precisely why the company rarely pays at low profit — the tax saving has to clear that hurdle first.
Which Should You Choose?
If your profit is modest, start as a sole trader: it is simpler, cheaper and the tax gap is small. As profit climbs reliably above the crossover — broadly £30,000–£50,000 for many, depending on how much you need to draw — the company's lower National Insurance, the dividend route and the option to retain profit usually win, even after the extra admin. You do not have to decide forever: many begin as a sole trader and incorporate once the numbers clearly favour it.