Is it better to be a sole trader or limited company in 2026/27?

At lower profit levels (under around £30,000-£35,000), sole trader is usually simpler and often cheaper once accountancy costs are considered. Above £35,000-£40,000 profit, a limited company typically offers tax savings, though the April 2026 dividend tax increase has narrowed the gap.

How much corporation tax does a limited company pay in 2026/27?

Small companies with profits up to £50,000 pay corporation tax at 19%. Companies with profits above £250,000 pay 25%. Profits between £50,000 and £250,000 are subject to marginal relief.

Can I pay myself salary and dividends from a limited company?

Yes. Most company directors pay themselves a small salary (typically up to the personal allowance of £12,570) and take the remainder as dividends. Dividends avoid National Insurance, which is the main tax efficiency of the limited company structure.

Sole Trader vs Limited Company in 2026/27: Which Pays Less Tax?

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 used to be straightforward — limited companies almost always paid less tax above a certain profit level. But the April 2026 dividend tax increase has changed the calculation. Here's how things stand in 2026/27.

⚠️ Dividend tax changed from April 2026

The basic rate of dividend tax increased from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75%, from 6 April 2026. This has narrowed — but not eliminated — the tax advantage of limited companies at most profit levels.

The Key Difference

As a sole trader, all your profits are subject to Income Tax and Class 4 National Insurance in the year they're earned. There's no separation between you and the business.

As a limited company, profits are subject to Corporation Tax (19–25%). You can then pay yourself a salary and dividends. Dividends don't attract National Insurance, which is where the tax saving comes from.

Tax Rates Compared 2026/27

Tax	Sole Trader	Limited Company
Profits tax	Income Tax 20%/40%/45%	Corporation Tax 19%/25%
NI on profits	Class 4: 6% / 2%	None on dividends
Dividend tax	N/A	10.75% / 35.75% / 39.35%
Employer NI on salary	N/A	15% above £5,000

Take-Home Pay Comparison by Profit Level

The figures below assume the limited company director pays a salary of £12,570 and takes the rest as dividends. Sole trader figures include Class 4 NI. These are estimates — always consult an accountant for your specific situation.

Annual Profit	Sole Trader take-home	Ltd Company take-home	Ltd advantage
£20,000	~£17,500	~£17,200	Sole trader wins
£30,000	~£24,500	~£24,900	~£400
£40,000	~£31,400	~£32,600	~£1,200
£50,000	~£38,300	~£40,400	~£2,100 ✓
£75,000	~£52,700	~£56,900	~£4,200 ✓
£100,000	~£65,500	~£72,800	~£7,300 ✓

💡 The crossover point

In 2026/27, the limited company structure typically starts to pay above around £35,000–£40,000 profit — but only after accounting for the additional accountancy costs of running a company (typically £500–£1,500/year more than sole trader accounts).

Other Advantages of a Limited Company

Tax isn't the only consideration. Limited companies also offer:

Limited liability — your personal assets are protected if the business has debts
Pension flexibility — the company can make pension contributions on your behalf, reducing corporation tax
Income timing — you can choose when to pay dividends, allowing tax planning across years
Professional perception — some clients prefer to work with limited companies
IR35 considerations — if you work through agencies or for large clients, IR35 rules may affect your choice

Disadvantages of a Limited Company

More administration — annual accounts, confirmation statements, corporation tax returns
Higher accountancy costs — typically £500–£1,500 more per year than sole trader
Less flexible — you can't just spend company money on personal expenses
Director responsibilities — legal obligations under Companies Act

Calculate your self-employed tax bill

Use our free self-employed tax calculator to see your Income Tax and Class 4 NI as a sole trader — then compare to the limited company figures above.

💼 Self-Employed Tax Calculator

Frequently Asked Questions

When does a limited company become worth it? ▼

In 2026/27, most accountants suggest the limited company structure starts to deliver meaningful tax savings above around £35,000–£40,000 annual profit, once additional accountancy costs are factored in. Below this level, the complexity often outweighs the savings.

How much does it cost to set up a limited company? ▼

Registering a limited company with Companies House costs just £50 online. The main ongoing cost is accountancy fees — typically £1,000–£2,000 per year for a simple owner-managed company, compared to £300–£700 for sole trader accounts.

Can I switch from sole trader to limited company? ▼

Yes. You can incorporate at any time by registering a new limited company and transferring your business to it. This is straightforward for most service businesses. There may be VAT, capital gains and other tax implications depending on your assets — speak to an accountant before doing this.

What is IR35 and does it affect me? ▼

IR35 is anti-avoidance legislation that can apply if HMRC deems you to be working like an employee through a limited company. If IR35 applies, you lose the tax benefits of the limited company structure. It's most likely to affect contractors working with public sector bodies or large private companies.

This article is for general information only and does not constitute financial or legal advice. The figures shown are estimates. Always consult a qualified accountant before deciding on your business structure.