Sole Trader vs Limited Company Calculator 2026/27
See exactly how much more (or less) you keep as a limited company compared to a sole trader. Includes Corporation Tax marginal relief, optimal director salary, dividend tax, and all Employer/Employee NICs.
Your Business Details
Winner
🧍 Sole Trader
🏢 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.