Sole trader vs limited company
On 2026/27 rates, with all profit paid out and £1,200 a year of company costs, a sole trader keeps more than a limited company at every profit from £10,000 to £300,000. A company pension contribution, or profit left in the company, is what can tip it the other way.
Rates for the 2026/27 tax year. Checked 7 November 2026.
| Sole trader | Limited company | |
|---|---|---|
| Profit | £60,000.00 | £60,000.00 |
| Company running costs | — | − £1,200.00 |
| Director’s salary | — | − £12,570.00 |
| Employer NI | — | − £1,135.50 |
| Pension | − £0.00 | − £0.00 |
| Company profit before tax | — | £45,094.50 |
| Corporation tax | — | − £8,567.96 |
| Dividends paid | — | £36,526.54 |
| Salary paid | — | £12,570.00 |
| Income tax | − £11,432.00 | − £0.00 |
| Class 4 NI | − £2,456.60 | — |
| Class 2 NI | Treated as paid | — |
| Employee NI | — | − £0.00 |
| Dividend tax | — | − £3,872.85 |
| Take-home | £46,111.40 | £45,223.69 |
| Total tax and NI | £13,888.60 | £13,576.31 |
| A month | £3,843 | £3,769 |
| Break-even profit | None from £10,000 to £300,000 |
|---|
This compares tax only, with all company profit paid out as dividends. Limited liability and clients who only contract with companies are covered in the questions below. Scottish income tax is not supported yet.
Worked example: £60,000 of profit
As a sole trader, £60,000 of profit carries £11,432 of income tax and £2,456.60 of Class 4 National Insurance. Class 2 is treated as paid, so it costs nothing. You keep £46,111.40.
Through a limited company, £1,200 of running costs, a £12,570 salary and £1,135.50 of employer NI leave company profit of £45,094.50. Corporation tax at 19% is £8,567.96, which leaves £36,526.54 to pay as dividends. The salary is covered by the personal allowance, and dividend tax is £3,872.85. You keep £45,223.69, which is £888 less than the sole trader.
With these defaults the two routes never cross between £10,000 and £300,000 of profit. Even with no company costs at all, the sole trader keeps £20 more at £60,000. On these figures, if you pay out everything the business makes, tax alone is not a reason to incorporate.
Why the result moves
Company running costs usually decide it. A company pays 15% employer NI on salary above £5,000 and corporation tax of 19% to 25% before dividend tax is charged on what is left, while a sole trader pays income tax and Class 4 NI at 6%, falling to 2% above £50,270. Since April 2026 the two stacks of tax come out close.
A pension contribution moves the result more than anything else. A company contribution saves corporation tax and avoids NI altogether, while a sole trader’s contribution gets income tax relief but no Class 4 relief. With no company costs and £10,000 a year into a pension, the company route wins between about £68,742 and £73,800 of profit. Other income pushes both routes into higher bands and usually widens the sole trader’s lead.
When this calculator is wrong for you
- You leave profit in the company. Corporation tax is then the only tax until you take it out, which this calculator does not model.
- You share the business with a spouse or partner, as partners or shareholders.
- You live in Scotland.
- The company has other employees, so it can claim the Employment Allowance against employer NI.
- Your work would be inside IR35 through a company.
Questions people ask
At what profit is a limited company worth it?
On 2026/27 rates, with all profit paid out as dividends and £1,200 a year of company costs, there is no break-even between £10,000 and £300,000: the sole trader keeps more at every level. Dividend tax rose to 10.75% and 35.75% in April 2026, which closed most of the old gap. A company pension contribution or leaving profit in the company can still tip it.
What are the extra costs of running a company?
Mostly accountancy, because company accounts and a corporation tax return cost more to prepare than a self assessment return. Add the Companies House confirmation statement fee, payroll software or a payroll bureau for the director’s salary, and a business bank account if yours charges. £1,200 a year is a modest default; many contractors pay more.
Does a limited company protect my personal assets?
Usually, for business debts the company owes. It does not protect you from your own negligence, personal guarantees you sign, or debts to HMRC where directors are made personally liable. Professional indemnity insurance often matters more than the legal form.
Does IR35 apply to sole traders?
No. IR35 applies when you work through an intermediary such as your own limited company. A sole trader can still be found to be an employee for tax purposes, but that is a straight employment status question.
When should I switch to a limited company?
When there is a reason other than tax on fully paid-out profit: a client that only contracts with companies, profit you want to leave in the business, a large pension contribution, or liability you want ringfenced. Try your own figures with a pension and any other income before you decide.
Is VAT different for a company?
No. The £90,000 registration threshold, the rates and the flat rate scheme are the same for a sole trader and a limited company, so VAT does not change this comparison.
Can I go back to being a sole trader?
Yes, but closing a company is more work than opening one. Profits must be extracted, which may be taxed as dividends or under the rules for distributions on winding up, and the company has to be struck off or liquidated.
How this is worked out
Sole trader: income tax on profit plus other income, less the tax on the other income alone, with the personal allowance tapered above £100,000; a personal pension is paid net with 20% relief at source and extends the basic and higher rate bands; Class 4 NI at 6% from £12,570 to £50,270 and 2% above; Class 2 treated as paid from the £7,105 small profits threshold, with voluntary Class 2 below it left out. Limited company: profit less running costs, salary, employer NI at 15% above £5,000 and any employer pension gives taxable profit; corporation tax at 19% to £50,000 and 25% from £250,000 with marginal relief between; everything left is paid as dividends and taxed above salary and other income at 10.75%, 35.75% and 39.35% after the £500 allowance; dividends count towards the allowance taper. The salary is capped at what the company can afford, and the best-salary option scores every salary in £100 steps. Both routes put the same amount into a pension. Break-even is found by scanning profit from £10,000 to £300,000 in £2,500 steps and bisecting the first crossing to the penny.
Full formulas, rounding rules and test cases are on the methodology page. Every rate update is listed in the changelog.