A complete tax and cost comparison — with a worked example at £60,000 profit showing exactly which structure puts more money in your pocket
Choosing between a sole trader and a limited company is one of the most important decisions a self-employed person can make. The right answer depends on your profit level, how much risk you take on, the clients you work with, and how much administration you are prepared to manage.
As a sole trader, HMRC taxes your trading profits through Self Assessment. Your total tax bill is made up of two components:
| Taxable profit | Income Tax | Class 4 NI |
|---|---|---|
| Up to £12,570 | 0% (Personal Allowance) | 0% |
| £12,571 – £50,270 | 20% (Basic Rate) | 6% |
| £50,271 – £125,140 | 40% (Higher Rate) | 2% |
| Above £125,140 | 45% (Additional Rate) | 2% |
Class 2 NI was abolished from April 2024. Your State Pension entitlement is protected automatically once profits exceed the Small Profits Threshold (£6,725).
See our full sole trader tax guide for worked examples and Self Assessment deadlines.
A limited company pays Corporation Tax on its profits before distributing anything to the director/shareholder. For 2026/27:
| Company profit | Corporation Tax rate |
|---|---|
| Up to £50,000 | 19% (Small Profits Rate) |
| £50,001 – £250,000 | 19%–25% (Marginal Relief — effective ~26.5% at £100k) |
| Above £250,000 | 25% (Main Rate) |
The company pays Corporation Tax on profits, then distributes the remaining post-tax profits to the director as dividends (or retains them for investment). Dividends are taxed at the director's personal dividend tax rates, which are lower than Income Tax rates on salary.
The tax advantage of a limited company comes almost entirely from replacing high-NI salary with lower-taxed dividends. The typical approach for a single director with no other income:
Most director-accountants recommend one of two salary levels:
For a sole director with no other employees, £12,570 salary is often optimal in 2026/27 — the Employer NI threshold was raised to match the Personal Allowance, so there is no Employer NI on this salary level.
Dividends come from post-Corporation-Tax profits. In 2026/27, the first £500 of dividends is tax-free (the Dividend Allowance). Above that:
| Dividend income | Dividend tax rate | Equivalent salary rate (IT + NI) |
|---|---|---|
| £500 (allowance) | 0% | — |
| Basic rate band | 8.75% | 26% (20% + 6% NI) |
| Higher rate band | 33.75% | 42% (40% + 2% NI) |
| Additional rate | 39.35% | 47% (45% + 2% NI) |
The saving per pound in the basic rate band: the sole trader pays 26p (20p IT + 6p NI), while the limited company director pays 19p Corporation Tax on the pound, then 8.75p dividend tax on what remains — roughly 26p combined. At this level the difference is small, but in the higher rate band the saving becomes meaningful.
Let's compare the two structures for a freelance consultant with £60,000 pre-tax profit (after business expenses), no other income, no pension contributions, no employment income.
Profit: £60,000
Income Tax calculation:
Class 4 NI calculation:
Company revenue: £60,000
Step 1 — Director salary: £12,570
Step 2 — Corporation Tax on remaining company profit
Step 3 — Director dividend income: £38,418
Accountant cost estimate: £1,200/year
There is no single breakeven number because it depends on your accountant fees, other income sources, pension strategy and how you extract money. But as a rule of thumb for a single director in 2026/27:
| Annual profit | Sole trader take-home | Ltd Co take-home (est.) | Better structure |
|---|---|---|---|
| £20,000 | ~£17,100 | ~£15,600 (after accountant) | Sole trader |
| £35,000 | ~£28,600 | ~£27,400 (after accountant) | Sole trader |
| £50,000 | ~£39,300 | ~£38,400 (after accountant) | Sole trader (marginal) |
| £60,000 | ~£46,100 | ~£43,300 (after accountant) | Sole trader |
| £80,000 | ~£57,400 | ~£57,900 (after accountant) | Limited company |
| £100,000 | ~£66,600 | ~£69,200 (after accountant) | Limited company |
| £150,000 | ~£88,700 | ~£96,500 (after accountant) | Limited company |
Figures above are illustrative estimates for a single director with no other income, taking the optimal salary + dividend mix, and assuming £1,200/year accountant fees. Use the calculators below for a personalised figure.
Tax efficiency is only one side of the comparison. A limited company involves meaningfully more administration:
The "limited" in limited company refers to the liability of shareholders — in most cases, limited to the value of shares they hold (typically £1 per share for a small company).
As a sole trader, you are personally liable for all business debts. If a client sues you successfully or you cannot pay a supplier, creditors can pursue your personal assets.
As a limited company director, the company is the contracting party. If the company cannot pay, shareholders generally cannot be pursued for more than their unpaid share capital — unless:
If you work as a contractor, IR35 is a critical consideration in your structure choice.
IR35 is HMRC anti-avoidance legislation that targets contractors who work like employees but bill through a limited company to reduce their tax bill. If you are found to be inside IR35, you lose most of the tax advantages of the limited company structure.
Sole traders are not subject to IR35 — the legislation only applies to limited company contractors. If your main concern is IR35 risk (for example, you work exclusively for a single large client who has blanket-determined all contractors as inside IR35), a sole trader arrangement avoids the IR35 issue entirely, at the cost of higher NI.
Read our full contractor vs employee tax guide for a detailed IR35 comparison.
Your profits are below £50,000–£60,000 and growing. You want minimal admin. You are just starting out and unsure whether the business will be long-term. You work for clients where IR35 is not a risk. Accounts and compliance feel like a distraction from doing the work.
Your profits are sustainably above £70,000–£80,000. You want to retain money in the company (for investment or to smooth lumpy income). You need limited liability for contractual or legal reasons. Clients require a limited company structure. You are doing high-volume contracting and your IR35 position is clearly outside.
Many UK freelancers and consultants follow the same trajectory: start as a sole trader while building the business, then incorporate once profits consistently exceed £60,000–£80,000 and the accountant confirms the tax saving outweighs the additional cost. There is no penalty for starting as a sole trader and incorporating later.
In 2026/27, a limited company typically becomes more tax-efficient at around £70,000–£80,000 profit once accountant fees (typically £800–£2,000/year for a small limited company) are factored in. Below that level, the tax saving is usually wiped out by the additional admin costs. The exact crossover depends on your specific circumstances.
The tax-efficient approach is to take a low salary (typically £12,570 — the Personal Allowance) and extract the rest as dividends. Dividends are taxed at lower rates than salary: 8.75% basic rate, 33.75% higher rate, 39.35% additional rate. The first £500 of dividends is tax-free (2026/27 Dividend Allowance). Crucially, dividends are not subject to National Insurance contributions.
No. Sole traders pay Income Tax and Class 4 NI on their profits — there is no Corporation Tax. Corporation Tax only applies to limited companies. For 2026/27, the main Corporation Tax rate is 25% on profits above £250,000, with a small profits rate of 19% on profits up to £50,000, and marginal relief between those levels.
Yes. As a sole trader, you and your business are the same legal entity. If the business cannot pay its debts, creditors can pursue your personal assets — your savings, car, or even your home. A limited company is a separate legal entity, so in most cases your personal liability is limited to the amount you invested in the company (typically £1 per share).
Yes — and this is a common path. Many people start as sole traders (simpler, lower cost) and incorporate when their profits grow large enough that the tax saving outweighs the admin costs. Incorporation is straightforward: register at Companies House (£12 online), notify HMRC, open a business bank account and transfer the business. You do not lose your trading history.
IR35 is anti-avoidance legislation that targets contractors working like employees but billing through a limited company. If HMRC or a client determines you are inside IR35, you lose most of the tax advantages of the limited company structure. Sole traders are not affected by IR35 — it only applies to limited company contractors. For contractors whose IR35 status is uncertain, this is a significant consideration when choosing a structure.