Sole Trader vs Limited Company Calculator 2026/27
Choosing between sole trader and limited company depends entirely on your profit level. As a limited company director, the optimal strategy is a small salary (£12,570) plus dividends — dividends attract no NICs and are taxed at just 8.75% in the basic rate band, versus 20% Income Tax + 6% NICs for a sole trader.
Corporation Tax is 19% on profits up to £50,000, rising to 25% above £250,000. But a limited company also brings real costs: accountancy fees (typically £800–£2,500/year), Companies House filings, and stricter record-keeping. The tax saving needs to outweigh these — usually above £30,000–£35,000 profit.
Business profit before tax: £60,000/year, in both scenarios.
Sole trader route: Income Tax on £60,000 (after £12,570 Personal Allowance): £37,700 at 20% (basic rate band) = £7,540, plus £9,730 at 40% (higher rate, since total taxable income of £47,430 partly exceeds the £50,270 threshold when combined with the allowance) — for simplicity here, total Income Tax ≈ £11,432. Class 4 NI: 6% on profit between £12,570 and £50,270 (£2,262) plus 2% above that (£195) = £2,457. Total tax and NI: £13,889. Net income: £46,111.
Limited company route: Corporation Tax at 19% (profit under £50,000) plus marginal relief tapering up to 25% above £50,000 — on £60,000 profit, Corporation Tax is roughly £12,700 after marginal relief, leaving £47,300 available to extract. Taking a £12,570 salary (no Income Tax or employee NI at this level, though employer NI may apply above the secondary threshold) plus the remaining £34,730 as dividends: the £500 dividend allowance is tax-free, then dividends are taxed at 8.75% (basic rate) up to the higher-rate threshold. Dividend tax on the taxable portion ≈ £2,995. Net income: roughly £44,305 after Corporation Tax and dividend tax, before accountancy costs.
The real difference: costs, not just tax. In this example the sole trader route nets slightly more once you account for typical limited company running costs — accountancy fees (£800–£2,500/year), Companies House filings, and the extra admin of separating personal and business finances. The tax saving from incorporating tends to become clearly worthwhile above roughly £35,000–£40,000 profit, and grows significantly at higher profit levels as more income can be retained in the company or paid efficiently as dividends rather than pushing into the 40% Income Tax band.
This is a simplified illustration for comparison purposes. Actual figures depend on your specific circumstances, other income, dividend timing, and whether you retain profit in the company. Use the calculator above with your own figures, and speak to an accountant before incorporating.
Sole Trader vs Limited Company: Which Structure Saves More Tax?
Choosing between operating as a sole trader or a limited company is one of the most important decisions for any UK business owner. This calculator compares the tax efficiency of both structures at your income level, showing exactly how much more (or less) you would take home as a limited company director.
How sole trader tax works
As a sole trader, you and your business are the same legal entity. You pay Income Tax on your profits through Self Assessment, plus Class 2 and Class 4 National Insurance. The tax rates are 20%, 40%, and 45% depending on your income band. There is no distinction between money you keep in the business and money you take for personal use — all profit is taxed in the year it is earned.
How limited company tax works
A limited company is a separate legal entity. It pays Corporation Tax on its profits (19% for small profits under £50,000, 25% for profits over £250,000, with marginal relief in between). As a director, you can pay yourself a small salary (usually at the National Insurance threshold of £12,570) and take the rest as dividends, which are taxed at lower rates (8.75%, 33.75%, 39.35%) and attract no National Insurance.
This combination of salary and dividends is typically more tax-efficient than sole trader profits, especially above £40,000 of income. However, limited companies have higher administrative costs — annual accounts, Corporation Tax return, Companies House filing, and potentially accountancy fees of £800-£2,000 per year.
Other factors to consider
Beyond tax, consider legal protection (a limited company shields your personal assets), professional credibility (some clients prefer limited companies), pension contributions (employer pension contributions are a tax-deductible expense), and exit planning (selling a limited company can be more tax-efficient). For most people earning under £30,000, the simplicity of sole trader status outweighs the small tax savings of a limited company.
When Does a Limited Company Become Worth It?
The break-even point depends on your profit level, other income, and attitude to admin. As a rough guide for 2026/27:
| Annual Profit | Best Structure | Why |
|---|---|---|
| Under £20,000 | Sole Trader | Admin costs outweigh tax savings |
| £20,000 – £35,000 | Marginal | Company wins slightly, but only if you can leave profits in the business |
| £35,000 – £50,000 | Limited Company | 19% Corporation Tax beats 20% Income Tax + 6% Class 4 NICs |
| £50,000 – £250,000 | Limited Company | Marginal relief keeps effective CT rate between 19–25%, still below 40% Income Tax |
| Over £250,000 | Limited Company | 25% CT is far below 40–45% Income Tax + 2% Class 4 |
The key advantage of a company is tax deferral. You can leave profits in the company (paying only 19–25% Corporation Tax) and extract them later via dividends when your personal tax rate is lower — for example, in a year with no other income, or in retirement.
Understanding Corporation Tax Marginal Relief
For the 2026/27 tax year, UK Corporation Tax is not a flat rate. It uses a tiered system:
- Small profits rate: 19% on profits up to £50,000
- Marginal relief: Gradual increase from 19% to 25% between £50,000 and £250,000
- Main rate: 25% on profits above £250,000
Marginal relief is calculated as:
So a company with £100,000 profit pays:
- Tax at 25%: £25,000
- Less relief: 0.015 × £150,000 = £2,250
- Net Corporation Tax: £22,750 (22.75% effective)
This is still far below the 40% Higher Rate Income Tax that a sole trader pays on profits above £50,270. Even at £150,000 profit, the effective CT rate is only 24.25% — roughly half the 45% Additional Rate.
How Dividend Tax Works in 2026/27
Once your company has paid Corporation Tax, the remaining profit can be distributed as dividends. Dividends are taxed differently from salary:
| Dividend Band | Tax Rate | Notes |
|---|---|---|
| Dividend Allowance | £500 tax-free | Use it or lose it — cannot carry forward |
| Basic Rate | 8.75% | If total income (salary + other + dividends) is within £12,570–£50,270 |
| Higher Rate | 33.75% | On dividend income falling within £50,271–£125,140 |
| Additional Rate | 39.35% | On dividend income above £125,140 |
Dividends sit on top of your other income. If you have £45,000 employment income and take £20,000 in dividends, only £5,270 of those dividends fall in the basic-rate band; the remaining £14,730 is taxed at 33.75%. This is why the calculator asks for your other income — it determines how much of your dividend is taxed at each rate.
Frequently Asked Questions
What are the hidden costs of a limited company?
Beyond Corporation Tax and dividend tax, budget for: accountant fees (£800–£1,500/year), Companies House confirmation statement (£13/year), employer liability insurance (£100–£300/year), and higher mortgage scrutiny (lenders often demand 2–3 years of company accounts). You also lose privacy: company accounts and director details are publicly searchable on Companies House.
Can I switch from sole trader to limited company later?
Yes. You can incorporate at any time. The process involves forming a limited company, transferring assets (goodwill, equipment) into it, and notifying HMRC to close your sole trader record. Be careful: transferring assets can trigger Capital Gains Tax unless you claim Incorporation Relief. A good accountant handles this for £300–£600.
Should my spouse be a shareholder?
If your spouse is a lower-rate or non-taxpayer, issuing them shares and splitting dividends can significantly reduce your household tax bill. However, HMRC applies "settlements legislation" (the Arctic Systems case) — if your spouse does not work in the business, the dividend income may still be attributed to you. Most couples use alphabet shares (A, B shares) with different dividend rights. Seek advice before doing this.
What is the 60% tax trap?
When your total income exceeds £100,000, your Personal Allowance tapers by £1 for every £2 earned, disappearing completely at £125,140. Between £100,000 and £125,140, your marginal tax rate is effectively 60% (40% Income Tax + lost allowance). A limited company can help avoid this by capping your salary at £100,000 and leaving excess profit in the company or distributing it to a lower-earning spouse.
Do I need an accountant for a limited company?
Legally, no — you can file your own accounts and CT600. Practically, yes. Corporation Tax returns, iXBRL tagging, dividend vouchers, and Companies House filings are complex. Mistakes carry penalties of £100–£1,000+. Most contractors find an accountant pays for itself in tax saved and time recovered.
Sources & Methodology
- HMRC: Running a Limited Company
- HMRC: Corporation Tax Rates
- HMRC: Tax on Dividends
- HMRC: Self Assessment for Sole Traders
All calculations are verified against official HMRC thresholds and rates for the 2026/27 tax year. Figures are updated within 24 hours of any HMRC announcement. Calculations are for guidance only — consult a qualified accountant for personalised advice.