“Should I go limited?” is the most common question from UK sole traders once their profits start climbing past £30,000. For years, the answer was straightforward: incorporate, pay yourself in salary plus dividends, and save thousands in tax and National Insurance.
That answer is now wrong — or at least, much less clear-cut than it was.
Three changes in 2025–26 have fundamentally reshaped the comparison. Dividend tax rose by 2 percentage points on 6 April 2026 (basic rate from 8.75% to 10.75%, higher rate from 33.75% to 35.75%). Employer National Insurance now starts at £5,000 of salary, not £9,100, and the rate increased to 15%. Meanwhile, Class 4 NI for sole traders was cut to 6%. Stack those together and, for someone drawing all their profit, the sole trader is now competitive with — or ahead of — a limited company at almost every profit level.
The limited company still has real advantages: limited liability protection, the ability to retain profit at lower Corporation Tax rates, and credibility with certain clients. But the tax saving alone is no longer a compelling reason to incorporate if you need to draw everything your business earns.
This guide walks through the 2026/27 numbers, the non-tax factors, and the decision framework — with links to the detailed guides on this site for each topic that goes deeper.
What Is the Difference Between a Sole Trader and a Limited Company?
A sole trader is an individual who runs a business in their own name — the business is not a separate legal entity, so you pay Income Tax and National Insurance on all profits regardless of whether you draw them, and you are personally liable for business debts. A limited company is a separate legal entity that pays Corporation Tax on its profits; you pay Income Tax and dividend tax only on what you extract as salary and dividends, and your personal liability is limited to what you invested. The choice affects your tax, your admin costs, your liability, and how clients engage you.
1. The Two Structures: What’s Actually Different
A sole trader is the simplest business structure, as described in HMRC’s guidance on working for yourself. You and the business are the same legal entity. You register with HMRC for Self Assessment (free), file one tax return a year, and pay Income Tax and National Insurance on your profits. You’re personally liable for all business debts — if the business fails, your personal assets (home, savings) are at risk. Your details are not on a public register.
A limited company is a separate legal entity, as explained in HMRC’s limited company guidance. The company owns the business, pays its own tax (Corporation Tax), and you interact with it as both a director (an employee who runs the business) and a shareholder (an owner who receives dividends). Your personal liability is limited to the value of your unpaid shares — if the company fails, your personal assets are generally protected. The company’s details, including your name as director, are on the public Companies House register.
The practical differences flow from that legal separation: different tax regimes, different filing obligations, different liability, and different ways of getting money out.
For the broader picture of how employment status and business structure interact — including the “worker” category and umbrella companies — see our self-employed tax UK guide.
2. How Sole Traders Are Taxed in 2026/27
A sole trader pays Income Tax and Class 4 National Insurance on their business profits — not on their turnover. Profit is turnover minus allowable expenses.
Income Tax (2026/27):
| Band | Taxable income | Rate |
|---|---|---|
| Personal Allowance | £0–£12,570 | 0% |
| Basic rate | £12,571–£50,270 | 20% |
| Higher rate | £50,271–£125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Class 4 National Insurance (2026/27):
| Band | Profits | Rate |
|---|---|---|
| Lower threshold | £0–£12,570 | 0% |
| Main rate | £12,571–£50,270 | 6% |
| Upper rate | Over £50,270 | 2% |
Class 2 NI was abolished, so there’s no longer a flat-rate weekly contribution. The 6% main rate (cut from 9% in 2024) is one of the key reasons sole traders are now more competitive — it’s significantly lower than the combined employer plus employee NI a company director pays on salary.
For the full breakdown of how drawings work, how much to set aside for tax, and how Payments on Account catch sole traders, see our how to pay yourself as a sole trader guide. For how Personal Allowance, tax bands, and the £100,000 taper interact, see our Personal Tax Allowance 2026 guide.
3. How Limited Companies Are Taxed in 2026/27
A limited company is taxed in two layers: the company pays Corporation Tax on its profits, and you pay personal tax on what you extract.
Corporation Tax (Financial Year 2026):
| Profits | Rate |
|---|---|
| Up to £50,000 | 19% (small profits rate) |
| £50,001–£250,000 | Marginal relief (effective ~26.5%) |
| Over £250,000 | 25% (main rate) |
The £50,000 and £250,000 limits are divided by the number of associated companies plus one — so if you control two companies, each gets a £25,000 lower limit and a £125,000 upper limit.
Extracting money — salary plus dividends:
The standard strategy is to pay yourself a low salary (tax-deductible for the company, reducing Corporation Tax) and take the rest as dividends (no NI, taxed at dividend rates). For 2026/27:
| Extraction | Amount | Tax |
|---|---|---|
| Optimal salary | £12,570 (Personal Allowance) | No income tax, no employee NI. Company pays £1,135.50 employer NI (15% on salary above £5,000) — unless Employment Allowance covers it |
| Dividend allowance | First £500 | 0% |
| Dividends in basic rate band | Up to £50,270 total income | 10.75% |
| Dividends in higher rate band | £50,271–£125,140 | 35.75% |
| Dividends in additional rate band | Over £125,140 | 39.35% |
Dividends carry no National Insurance — neither employee nor employer. This is the main remaining tax advantage of the company route: money extracted as dividends avoids the 6%+ NI that a sole trader pays on the same profit.
The Employment Allowance catch: A company with only one director and no other employees cannot claim the Employment Allowance (£10,500/year against employer NI). So a single-director company pays the full £1,135.50 employer NI on a £12,570 salary. With two or more employees, the allowance covers it entirely.
If the employer NI is a concern, an alternative is a £5,000 salary (zero employer NI, but doesn’t qualify for State Pension) or £6,708 (the Lower Earnings Limit — qualifies for State Pension with only £256 employer NI). The optimal choice depends on your company’s tax position and whether you can claim Employment Allowance.
4. The Head-to-Head: Take-Home Pay at Different Profit Levels
Here’s the comparison at three profit levels for 2026/27, assuming you draw all profit and have no other income. The limited company figures assume a £12,570 salary plus dividends, with the company paying 19% Corporation Tax (small profits rate) and £1,135.50 employer NI.
At £30,000 profit
| Sole trader | Limited company | |
|---|---|---|
| Income Tax | £2,286 (20% on £17,430) | £0 on salary; £1,365 dividend tax |
| National Insurance | £1,046 (6% on £17,430) | £1,135 employer NI on salary |
| Corporation Tax | £0 | £3,096 (19% on £16,295) |
| Total tax | £3,332 | £5,596 |
| Take-home | £26,668 | £24,404 |
Sole trader wins by ~£2,264. At this level, the company’s Corporation Tax plus dividend tax plus employer NI exceeds the sole trader’s Income Tax plus Class 4 NI. The accountancy fees (£800–£2,000/year) make the company even less attractive.
At £50,000 profit
| Sole trader | Limited company | |
|---|---|---|
| Income Tax | £7,286 (20% on £37,430) | £0 on salary; £3,977 dividend tax |
| National Insurance | £2,246 (6% on £37,430) | £1,135 employer NI |
| Corporation Tax | £0 | £8,796 (19% on £46,295) |
| Total tax | £9,532 | £13,908 |
| Take-home | £40,468 | £36,092 |
Sole trader wins by ~£4,376. Even at £50,000 profit — the old “tipping point” for incorporation — the sole trader is ahead if you draw everything. The dividend tax rise and employer NI costs have shifted the break-even upward.
At £80,000 profit
| Sole trader | Limited company | |
|---|---|---|
| Income Tax | £17,286 (£7,286 at 20% + £10,000 at 40%) | £0 on salary; £14,538 dividend tax |
| National Insurance | £2,846 (£2,246 at 6% + £600 at 2%) | £1,135 employer NI |
| Corporation Tax | £0 | £12,824 (marginal relief on £66,295) |
| Total tax | £20,132 | £28,497 |
| Take-home | £59,868 | £51,503 |
Sole trader wins by ~£8,365. At £80,000, the sole trader is clearly ahead if you draw everything. The limited company’s advantage only reappears if you can leave profit in the company — retained earnings are taxed once at 19–26.5% Corporation Tax, deferring the personal dividend tax until you extract them.
The key takeaway
If you draw all your profit to live on, sole trader is competitive or ahead at almost every level in 2026/27. The limited company wins when:
- You can retain profit in the company (taxed at 19–26.5% until extracted)
- You need limited liability protection
- Clients require a limited company structure
- You can use the company for pension planning (employer pension contributions are deductible for Corporation Tax and don’t trigger employer NI)
5. Admin and Costs: The Hidden Price of a Company
Tax is only half the comparison. A limited company carries significantly more admin and cost than a sole trader.
Sole trader admin:
- Register for Self Assessment (free, online)
- File one tax return per year (by 31 January)
- Keep records (digital if over the MTD threshold)
- If over £50,000 qualifying income: quarterly MTD updates from April 2026
Sole trader costs:
- Self Assessment return: £150–£600/year (or free if you file yourself)
- Accounting software: £0–£30/month (free options exist for MTD)
Limited company admin:
- Register with Companies House (£100 online, from February 2026)
- File annual accounts with Companies House
- File a Corporation Tax return (CT600) with HMRC
- File a Confirmation Statement annually (£50 to Companies House)
- Run PAYE payroll for director salary (report to HMRC via RTI each pay period)
- File a personal Self Assessment for your dividends and salary
- From November 2026: director identity verification via GOV.UK One Login (under the Economic Crime and Corporate Transparency Act 2023)
- If VAT-registered: VAT Returns through MTD-compatible software
Limited company costs:
- Annual accounts and CT600: £800–£2,000/year in accountancy fees
- Confirmation Statement: £50/year
- Payroll processing: £10–£30/month
- Bookkeeping software: £15–£40/month
- Total: typically £1,200–£2,500/year before any tax saving
The admin gap has narrowed slightly since MTD for sole traders started in April 2026 — sole traders over £50,000 now keep digital records and send quarterly updates too. But a company still has more deadlines, more filings, and more ways to trigger penalties. See our Self Assessment penalties guide for what happens when you miss one.
6. IR35: The Risk That Only Applies to Companies
IR35 (the off-payroll working rules) applies to contractors who work through an intermediary — typically a Personal Service Company. If HMRC decides a contract is “inside IR35,” the fee-payer must operate PAYE on that engagement, meaning the company receives less and the director pays income tax and employee NI on that income.
IR35 does not apply to sole traders. If you contract directly with a client as a sole trader, ordinary employment status rules apply instead — the same control, substitution, and mutuality of obligation tests, but without the IR35 framework. If HMRC decides your sole-trader engagement is actually employment, the client must operate PAYE. See our IR35 and sole traders guide for the full framework.
The April 2026 threshold change: From 6 April 2026, the small-company thresholds that determine which clients must make IR35 determinations increased:
| Threshold | Before April 2026 | From April 2026 |
|---|---|---|
| Turnover | £10.2 million | £15 million |
| Balance sheet total | £5.1 million | £7.5 million |
| Employees | 50 | 50 (unchanged) |
This means more clients qualify as “small” and are exempt from the off-payroll rules — the responsibility for determining IR35 status passes back to the contractor’s PSC. The practical effect kicks in from April 2027 at the earliest, because the size test looks at the previous financial year.
If you’re a contractor, this doesn’t remove IR35 risk — it shifts who makes the determination. But it does mean more clients may be willing to engage your limited company without requiring a Status Determination Statement.
7. Limited Liability: When It Matters and When It Doesn’t
The “limited” in limited company means your personal liability is capped at the value of your unpaid shares. If the company is sued or goes bust, your personal assets (home, savings) are generally protected.
When limited liability matters:
- You have significant contracts where a breach could lead to a large claim
- You employ staff (employment disputes, redundancy claims)
- You hold stock or equipment that could be lost in insolvency
- You’re in an industry with regulatory or product liability risk
- You plan to raise investment (investors require a company structure)
When it doesn’t:
- You’re a freelance consultant with no stock, no staff, and low-risk contracts
- Your main liability is tax — HMRC can pursue directors personally for unpaid PAYE/NIC in cases of negligence or fraud, so the company structure doesn’t fully protect you here
- You give personal guarantees for business loans or leases — these override the limited liability protection
- You’re a small sole trader with minimal risk exposure
For many service-based sole traders — consultants, writers, designers, developers — the practical risk of being personally liable for business debts is low. The main exposure is usually tax, and HMRC has powers to pursue directors personally in certain circumstances regardless of the company structure.
8. How to Switch: Incorporating a Sole Trader
If you decide to incorporate, the process is:
- Register a new company with Companies House — £100 online (from February 2026), typically completed within 24 hours
- Transfer business assets to the company — equipment, stock, goodwill, and any intellectual property
- Close your sole trader registration with HMRC — notify them you’ve ceased self-employment
- Set up PAYE payroll for your director salary — register as an employer with HMRC
- Register the company for Corporation Tax — HMRC will send a CT41G form, or you can register online
- Register for VAT if applicable — you can transfer your existing VAT number to the company
Incorporation Relief (s.162 TCGA 1992): When you transfer your business to a company, it’s treated as a disposal for Capital Gains Tax purposes — even though no money changes hands. Without relief, this could trigger a CGT bill on the value of goodwill transferred. Incorporation Relief defers the gain by reducing the base cost of the shares you receive.
Important change from 6 April 2026: Incorporation Relief must now be actively claimed on your Self Assessment return — it’s no longer given automatically. The claim deadline is the first anniversary of 31 January following the tax year of transfer. For a transfer in 2026/27, the deadline is 31 January 2029. Failing to claim means CGT becomes payable immediately on the goodwill gain.
For the registration steps specifically, see our first-year self-employed checklist — and if you’re locked out of your Government Gateway account during the process, see our locked out of Government Gateway guide. For the full step-by-step walkthrough of switching — including incorporation relief, BADR, and the tax traps to avoid — see our sole trader to limited company guide.
9. VAT and MTD: How Each Structure Is Affected
VAT registration works the same way for both structures — the £90,000 threshold applies regardless. See our VAT registration for sole traders guide for the full rules.
Making Tax Digital for Income Tax applies to sole traders and landlords with qualifying income over £50,000 from April 2026 — but not to limited companies. Companies operate under Corporation Tax rules, and MTD for Corporation Tax is not yet in force (no firm date). This means:
- A sole trader over £50,000 qualifying income: quarterly MTD updates + final declaration, starting April 2026
- A limited company: annual Corporation Tax return (CT600) only — no quarterly income tax updates
This is one admin advantage the company still holds. However, the company still has its own filing obligations (annual accounts, Confirmation Statement, payroll RTI), so the total admin isn’t necessarily lower — it’s just different.
For the full MTD picture, see our Making Tax Digital guide and our MTD for income tax explained guide.
10. The Decision Framework
Here’s the framework for deciding, based on the 2026/27 numbers:
Stay a sole trader if:
- Your profit is under £40,000 — the company’s £1,200–£2,500/year admin costs exceed any tax saving
- You draw all your profit to live on — the tax gap has closed, and the company may actually cost more
- You’re a low-risk service business with no employees, no stock, and minimal liability exposure
- You value simplicity — one tax return, no Companies House filings, no payroll
- You’re concerned about IR35 — sole traders aren’t caught by the off-payroll rules (though employment status still applies)
Incorporate if:
- Your profit is over £50,000 AND you can leave some in the company — retained profit is taxed at 19–26.5% Corporation Tax until you extract it
- You need limited liability — significant contracts, employees, stock, or regulatory risk
- Your clients require it — some clients won’t engage sole traders, particularly in contracting and consulting
- You want to use employer pension contributions — the company can pay into your pension as a deductible expense, saving Corporation Tax and avoiding employer NI
- You plan to raise investment or sell shares — you need a company structure to issue shares
The break-even has moved. A few years ago, £30,000 profit was the tipping point. Now, with higher dividend tax, lower employer NI thresholds, and lower sole trader NI, the number is closer to £50,000 — and only if you don’t need to draw everything. For most sole traders drawing all their profit, the tax saving from incorporation is now too small to justify the admin and accountancy costs.
11. 5 Myths About Switching to a Limited Company
Most of the advice you’ll read online about going limited is either outdated or was never true in the first place. Here are five myths that cost sole traders real money — either by incorporating when they shouldn’t, or by not incorporating when they should.
Myth 1: “A limited company always pays less tax”
Background: This was the default advice for years — incorporate, pay yourself in salary plus dividends, and save thousands.
The reality: In 2026/27, it’s often wrong. The April 2026 dividend tax rise (to 10.75%/35.75%), employer NI starting at £5,000, and Class 4 NI cut to 6% mean a sole trader drawing all their profit is now competitive with — or ahead of — a limited company at most income levels. At £50,000 profit, a sole trader takes home ~£4,376 more than a limited company if both draw everything (see §4). The company only wins on tax when you can leave profit in it — retained earnings are taxed once at 19–26.5% Corporation Tax until you extract them.
What to do instead: Run the numbers for your actual profit level and how much you need to draw. If you draw everything to live on, the tax saving may not exist. If you can retain profit, the company still wins.
Myth 2: “Going limited protects you from all personal liability”
Background: The “limited” in limited company means your personal liability is capped at the value of your unpaid shares.
The reality: Limited liability protects you from business debts — but not from everything. HMRC can pursue directors personally for unpaid PAYE/NIC in cases of negligence or fraud. If you give a personal guarantee for a business loan or lease (common for new companies), that overrides the limited liability protection. And if you’re a low-risk freelancer with no stock, no staff, and no significant contracts, the practical benefit of limited liability is minimal — your main exposure is tax, which the company structure doesn’t fully shield.
What to do instead: Assess your actual liability exposure before incorporating. If your main risk is tax, a company structure doesn’t solve it. If you have significant contracts, employees, or stock, limited liability matters.
Myth 3: “IR35 doesn’t affect sole traders, so staying sole trader avoids the risk”
Background: IR35 (the off-payroll working rules) applies to intermediaries — typically a Personal Service Company. Sole traders aren’t caught by IR35.
The reality: True — but misleading. If you contract directly with a client as a sole trader, ordinary employment status rules apply instead: the same control, substitution, and mutuality of obligation tests. If HMRC decides your sole-trader engagement is actually employment, the client must operate PAYE on that engagement. You haven’t avoided the risk — you’ve moved it to a different framework. See our IR35 and sole traders guide for the full framework.
What to do instead: Don’t choose sole trader status to dodge IR35. If your working arrangements look like employment, HMRC can reclassify you regardless of your business structure. Focus on genuine self-employment indicators (substitution, control, multiple clients) instead.
Myth 4: “Incorporation Relief is automatic — you don’t need to do anything”
Background: When you transfer your business to a company, it’s treated as a disposal for CGT purposes. Incorporation Relief (s.162 TCGA 1992) defers the gain by reducing the base cost of your shares.
The reality: This was true until 6 April 2026. From that date, Incorporation Relief must be actively claimed on your Self Assessment return — it’s no longer given automatically. The claim deadline is the first anniversary of 31 January following the tax year of transfer. For a transfer in 2026/27, the deadline is 31 January 2029. Failing to claim means CGT becomes payable immediately on the goodwill gain — which could be thousands of pounds. See our sole trader to limited company guide for the full process.
What to do instead: If you’re incorporating, file the Incorporation Relief claim on your Self Assessment return. Don’t assume HMRC will apply it for you.
Myth 5: “A limited company means less admin because you don’t do MTD quarterly updates”
Background: MTD for Income Tax applies to sole traders and landlords with qualifying income over £50,000 from April 2026 — but not to limited companies. Companies operate under Corporation Tax rules, and MTD for Corporation Tax is not yet in force.
The reality: True that companies skip MTD quarterly updates — but the company has its own filing obligations: annual accounts with Companies House, a Corporation Tax return (CT600), a Confirmation Statement, PAYE payroll RTI filings, and (from November 2026) director identity verification. Total ongoing cost: typically £1,200–£2,500/year in accountancy fees, compared to £150–£600/year for a sole trader. The admin isn’t lower — it’s different, and there’s more of it.
What to do instead: Don’t incorporate to avoid MTD. The company’s admin burden is heavier than a sole trader’s MTD quarterly updates, and it costs more in professional fees.
The Bottom Line
- The tax gap has narrowed. Dividend tax up to 10.75%/35.75%, employer NI from £5,000, and Class 4 NI at 6% mean a sole trader drawing all profit is now competitive with or ahead of a limited company at most income levels.
- The company still wins when you retain profit. Money left in the company is taxed once at 19–26.5% Corporation Tax. If you don’t need to draw everything, this is the main remaining tax advantage.
- Admin costs £1,200–£2,500/year. Annual accounts, CT600, Confirmation Statement, payroll, and higher accountancy fees. Below £40,000 profit, these costs exceed any tax saving.
- IR35 only applies to companies, not sole traders — but employment status rules still apply to sole trader engagements. The April 2026 threshold increase moves more clients outside the off-payroll regime.
- Limited liability matters for some, not all. If you have significant contracts, employees, or stock, it’s valuable. If you’re a low-risk freelancer, the practical benefit is limited.
- Incorporation Relief must be claimed from April 2026 — it’s no longer automatic. File the claim on your Self Assessment return or face an immediate CGT bill on goodwill.
- MTD for Income Tax doesn’t apply to companies — but companies have their own filing obligations, so total admin isn’t necessarily lower.
The decision now turns on liability, admin tolerance, and how you extract money — not a tax saving that may no longer be there. If you’re unsure, talk to an accountant with your specific numbers before incorporating. The cost of the advice is a fraction of the cost of getting the structure wrong. Find an accountant through our free matching service — mention you’re considering incorporation and we’ll match you with someone who can run the numbers for your specific situation.
For the broader employment-status framework — including the “worker” category, umbrella companies, and how HMRC tests employment status — see our self-employed tax UK guide. For IR35 specifically, see our IR35 and sole traders guide.
For the full comparison of self-employed business structures — sole trader, limited company, umbrella, and CIS — see our self-employed business structure hub.