"Should I go limited?" is the question every growing UK sole trader eventually asks. The honest answer is: it depends on your profit, how much you draw out, and how much admin you're willing to take on. For some people incorporating saves a few thousand pounds a year; for others it just adds accountancy fees for no benefit.
This guide explains how each structure is taxed in the 2025/26 tax year, then runs a real £60,000 example through both so you can see the difference in pounds, not vague theory.
The two structures in one minute
As a sole trader, you and the business are the same legal person. All profit is yours, taxed through Self Assessment. It's cheap and simple, but your personal assets are exposed if things go wrong.
A limited company is a separate legal entity. It pays corporation tax on its profit, and you extract money as a mix of salary and dividends. You get limited liability and more tax-planning levers, but also Companies House filings, annual accounts and more admin.
How a sole trader is taxed in 2025/26
You pay two things on your profit:
- Income tax, 0% up to the £12,570 personal allowance, then 20% (basic), 40% (higher, from £50,270) and 45% (additional, from £125,140).
- Class 4 National Insurance, 6% on profits between £12,570 and £50,270, then 2% above £50,270. Class 2 NIC is no longer separately charged for most, following its removal.
Everything is reported once a year through Self Assessment, per HMRC rules. Note the personal allowance tapers away once income passes £100,000, creating an effective 60% band between £100,000 and £125,140.
How a limited company is taxed in 2025/26
There are two layers:
- Corporation tax, 19% on profits up to £50,000 (small profits rate), rising to 25% on profits over £250,000, with marginal relief tapering between the two.
- Dividend tax on money you take out, 8.75% (basic rate), 33.75% (higher) and 39.35% (additional), after a £500 tax-free dividend allowance.
The classic strategy is a small salary plus dividends: pay yourself a salary up to a NIC-efficient threshold (which is also a deductible company expense), then take the rest as dividends, which carry no National Insurance at all. That NIC saving is the main reason incorporating can beat sole-trader status.
The worked example: £60,000 profit
Let's compare a sole trader with £60,000 profit against a limited company earning £60,000 before the director's pay, using a £12,570 salary plus dividends. Figures are 2025/26 estimates for illustration, England rates.
| Item | Sole Trader | Limited Company |
|---|---|---|
| Profit before owner pay | £60,000 | £60,000 |
| Director's salary | - | £12,570 |
| Taxable company profit | - | £47,430 |
| Corporation tax (19%) | - | £9,012 |
| Profit available as dividends | - | £38,418 |
| Income tax | £11,432 | £0 on salary |
| Class 4 NIC | £2,456 | - |
| Dividend tax | - | ~£3,244 |
| Total tax + NIC | ~£13,888 | ~£12,256 |
| Approx. take-home | ~£46,112 | ~£47,744 |
At £60,000, the limited company comes out roughly £1,600 ahead before accountancy fees. Once you subtract £1,000–£2,000 for a company accountant, the real-world gap narrows, which is why the crossover point matters so much.
Model your own figures with the sole trader tax calculator and the limited company tax calculator.
Where the crossover point sits
Below about £30,000–£40,000 of profit, the sole trader route usually wins or ties: the tax difference is small and you avoid company costs. Between roughly £40,000 and £50,000, the limited company edges ahead if you're disciplined about the salary-plus-dividend split. Above £50,000, where higher-rate tax and the 2% NIC band kick in for sole traders, the company advantage tends to grow.
But this only holds if you don't need to draw every penny. If you spend all your profit each month, the dividend-deferral advantage disappears.
The dividend allowance keeps shrinking
The tax-free dividend allowance was £2,000 a few years ago; it is now just £500. Combined with dividend rates that have crept up, the limited-company advantage is smaller than it was in the mid-2010s. Any guide written before 2024 will overstate the savings, always check current-year figures.
Beyond tax: the practical trade-offs
- Limited liability, a company shields your personal assets; a sole trader is personally liable for business debts.
- Credibility, some clients and lenders prefer dealing with a limited company.
- Admin, companies file annual accounts, a confirmation statement and a corporation tax return; sole traders file one Self Assessment.
- Privacy, company directors' details appear on the public Companies House register; sole traders stay private.
- Retaining profit, a company can keep profit inside at 19–25% and draw it later, smoothing income across years.
Making Tax Digital is changing the sole-trader route
From April 2026, Making Tax Digital for Income Tax begins phasing in for sole traders and landlords with qualifying income over £50,000, requiring digital records and quarterly updates. It doesn't change what you owe, but it does raise the admin bar for staying a sole trader, worth factoring into your decision.
Don't forget the pension lever
A limited company can make employer pension contributions directly from pre-tax company profit, which are deductible against corporation tax and avoid the dividend layer entirely. For higher earners planning ahead, this is often a bigger saving than the salary-versus-dividend split itself.
The salary sweet spot explained
Why £12,570 for the director's salary? It uses up your full personal allowance tax-free while staying at a National-Insurance-efficient level. Some directors instead set salary at the secondary threshold to keep the company clear of employer's NIC, or higher to qualify for a full year of State Pension credit, the optimum shifts each year as thresholds and the Employment Allowance change. Above the salary, dividends are only payable out of retained profit after corporation tax, so you can never pay yourself more in dividends than the company has actually earned and taxed.
A higher example: £90,000 profit
The company advantage grows with profit, but so does its complexity. At £90,000 a sole trader is deep into the 40% higher-rate band and losing part of the personal allowance nowhere yet, while paying 2% Class 4 NIC on everything above £50,270. A limited company owner can leave surplus profit inside the business at 19–25% corporation tax and draw it in a later, lower-income year, or divert it into an employer pension. This income-smoothing ability, not the headline rate, is often where the biggest real savings sit for higher earners. The trade-off is that dividends drawn into the higher band cost 33.75%, so pulling everything out in one year erases much of the gain.
Watch the £100,000 trap
Between £100,000 and £125,140 of income, the personal allowance is withdrawn at £1 for every £2 earned, creating a punishing 60% effective marginal rate. Sole traders hit this directly on profit. Company owners have more control: by capping dividends and routing surplus into a pension, they can keep taxable income below £100,000 and sidestep the trap entirely, a planning lever unavailable to sole traders.
Payments on account catch sole traders out
Sole traders on Self Assessment usually make payments on account: two advance instalments toward next year's bill, each 50% of the current year's tax, due 31 January and 31 July. In your first profitable year that can mean paying roughly 150% of one year's tax in a single January, a brutal cash-flow surprise if you haven't planned for it. Company owners face a different rhythm: corporation tax is due nine months and one day after the accounting period ends, and personal dividend tax runs through Self Assessment, so the timing is more spread out but there are more deadlines to track.
IR35 and working through your own company
If you incorporate mainly to provide your personal services to one or two clients, be aware of the off-payroll working rules (IR35). Where an engagement looks like disguised employment, the tax advantages of a company can be neutralised, the fee may be taxed much like employment income. Genuine businesses with multiple clients, their own equipment and real commercial risk are on far safer ground. Don't incorporate purely to reduce tax on what is effectively an employed role.
Switching later isn't free
You can incorporate an existing sole-trader business, but it's a genuine transfer: assets move to the company, goodwill may be valued, and there can be capital gains implications (incorporation relief can defer these). Going the other way, closing a company, involves striking off or liquidation, with its own tax treatment. Because switching has friction, it's worth modelling two or three years ahead rather than flip-flopping annually.
A quick decision guide
- Profit under ~£40k and want simplicity? Stay a sole trader.
- Profit £40k–£50k+ and you can leave money in the business? A limited company likely wins.
- Want liability protection or plan to reinvest and grow? Go limited regardless of the marginal tax gap.
Whichever you pick, put money aside for the bill as you earn, the tax set-aside calculator helps you avoid a January cash-flow shock. Comparing across borders? Use the compare taxes by country tool.
The bottom line
For 2025/26, a limited company still beats sole-trader status on tax once profit climbs past the higher-rate threshold and you can leave some profit inside the business, but the gap is narrower than it used to be, and accountancy fees plus MTD admin eat into it. Run your actual numbers before you incorporate; a difference of a few hundred pounds rarely justifies the extra paperwork, but a few thousand often does.