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.
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.
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.
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.
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.
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.
For the 2026/27 tax year, UK Corporation Tax is not a flat rate. It uses a tiered system:
Marginal relief is calculated as:
So a company with £100,000 profit pays:
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.
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.
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.
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.
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.
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.
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.
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.