Sole Trader vs Limited Company — Tax Comparison 2026/27
How the tax treatment actually differs
As a sole trader, all your business profit is taxed as personal income — 20%, 40% or 45% depending on your total income — plus Class 4 National Insurance. There’s no separation between you and the business; profit is yours the moment it’s earned, taxed accordingly.
A limited company is a separate legal entity. It pays Corporation Tax on its profits — 19% for profits up to £50,000, tapering up to the full 25% rate on profits above £250,000, with marginal relief in between. You then draw money out as salary (taxed as employment income) and/or dividends (taxed at lower dividend rates, with a £500 tax-free dividend allowance), giving more control over how and when you’re personally taxed.
Where the real trade-offs are
- Limited companies typically become more tax-efficient once profits consistently exceed roughly £40,000-£50,000 a year, because the combined salary/dividend route usually beats paying Income Tax and Class 4 NI on the whole amount as a sole trader
- Running a limited company means more admin: separate business bank account, statutory accounts, a Corporation Tax return, and Companies House filings, usually requiring an accountant
- Limited liability genuinely protects personal assets if the business runs into debt or is sued — sole traders are personally liable for all business debts
- Some clients, particularly larger businesses, prefer or require contracting through a limited company rather than with a sole trader directly
There’s no universal right answer
The best structure depends heavily on your actual profit level, how much you need to draw out to live on versus reinvest, and how much admin you’re willing to take on. Running your real numbers through a sole trader vs limited company calculator gives a far more useful answer than a rule of thumb.