Sole Trader vs Limited Company: 2026/27 Tax Reality

The "Default" Advice Has Changed

For years, the standard advice for UK contractors was "Go Limited to save tax." On 2026/27 rules, that advice fails the arithmetic. The Dividend AllowanceThe amount of dividend income you can receive each year before dividend tax applies. It is £500 for 2026/27. is £500, dividend tax rates rose by 2 percentage points in April 2026, and employer National Insurance now starts at a £5,000 salary and runs at 15%.

So we ran the site's own calculators at three profit levels rather than repeating the old rule of thumb. The result: in England, Wales and Northern Ireland, if you draw everything you earn, the company route pays more total tax than staying a sole trader at £30,000, £50,000 and £80,000 alike (Scotland flips at higher profits - covered below). The case for incorporating now rests on limited liability, retained profit and flexibility - not the headline tax bill. This guide shows the actual numbers so you can decide.

The Actual Numbers: £30,000, £50,000 and £80,000

The comparison below uses 2026/27 rates for England, Wales and Northern Ireland and assumes the profit is your only income. The sole trader pays Income Tax plus Class 4 National InsuranceClass 4 National Insurance: National Insurance paid by the self-employed on their profits, on top of Income Tax. For 2026/27 it is 6% on profits between £12,570 and £50,270, and 2% above that. on profit. The company route uses the classic structure: a £12,570 director's salary (matching the Personal AllowanceThe amount of income you can earn each year before income tax. It is £12,570 for 2026/27, tapering away by £1 for every £2 of income over £100,000.), with every remaining pound paid out as dividends in the same year. Both columns were computed with our self-employed tax calculator engine and dividend tax and director salary calculator engine - run your own figures through either.

Figures are rounded to the nearest pound and totals are computed before rounding, so components can differ from a total by £1.

Here is the full working at £50,000 so you can see where each pound goes. The sole trader pays Income Tax of (£50,000 - £12,570) × 20% = £7,486, plus Class 4 NI of (£50,000 - £12,570) × 6% = £2,246: total £9,732. The company pays employer NI on the salary of (£12,570 - £5,000) × 15% = £1,136, Corporation Tax of 19% on the £36,295 left after salary and employer NI = £6,896, and dividend tax on the £29,399 it can then distribute: after the £500 allowance, £28,899 × 10.75% = £3,107. Total: £11,138. The salary itself is covered by the Personal Allowance and sits exactly at the employee NI threshold, so no Income Tax or employee NI is due on it.

Two honest caveats. First, these are full-extraction scenarios - the picture changes when profit stays in the company, covered below. Second, the gap is a few percent of profit, not a cliff: other factors (pension contributions, a spouse shareholder, contract requirements, liability exposure) can outweigh it in either direction.

What "19-25%" Corporation Tax Actually Means

The Corporation Tax range you see quoted everywhere hides a specific mechanism: marginal relief. Taxable profits up to £50,000 pay the 19% small profits rate. Profits of £250,000 or more pay the 25% main rate. In between, relief tapers the bill - and the effective rate on each extra pound in that band is 26.5%, higher than the main rate itself, per GOV.UK's marginal relief guidance.

One worked line: on taxable profit of £100,000, the company computes 25% = £25,000, then deducts relief of (£250,000 - £100,000) × 3/200 = £2,250, giving £22,750 - an average rate of 22.75%. Note the limits are shared between associated companies: run two companies and each gets half the bands.

Making Tax Digital Rebalances the Admin

The traditional "sole trader = low admin" claim needs a 2026 update. Since 6 April 2026, sole traders and landlords with qualifying income over £50,000 are in Making Tax DigitalMaking Tax Digital for Income Tax: HMRC's shift to digital tax: since April 2026, sole traders and landlords above the qualifying-income threshold must keep digital records and send quarterly updates instead of one annual Self Assessment return. for Income Tax: digital records, quarterly updates through compatible software, plus a final declaration. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028. Two traps inside that sentence: qualifying income means your gross self-employment and property turnover before expenses, not profit - and HMRC assesses it from the tax return two years back (April 2026 mandation came from your 2024/25 return). Our Making Tax Digital for Income Tax guide covers the thresholds, exemptions and software routes in full.

A limited company does not escape admin - annual accounts, a confirmation statement and a Company Tax Return are all still due - but MTD for Income Tax specifically does not apply to a director's salary or dividends. At exactly the profit levels where incorporation gets discussed, the sole trader's admin advantage is now narrower than the old advice assumed.

The £10,500 Allowance Most One-Person Companies Cannot Claim

The Employment AllowanceA relief that lets eligible employers cut their employer National Insurance bill by up to £10,500 (2026/27). A single-director company with no other employee above the secondary threshold cannot claim it. lets eligible employers knock up to £10,500 off their employer NI bill in 2026/27. The carve-out generic comparisons miss: a company whose only employee liable for employer (secondary Class 1) NI is its sole director cannot claim it. That is precisely the classic one-person contractor company - which is why the £1,136 employer NI charge appears in every company column above. Add a second employee (or a second director) paid above the £5,000 secondary thresholdThe pay level above which an employer pays Class 1 National Insurance on a worker - £5,000 a year for 2026/27, with employer NI charged at 15% above it. and the allowance can wipe that charge out, shifting the comparison a step back toward the company. The right salary level and split is its own decision - our director salary and dividend strategy guide works through it.

When the Company Still Wins: Profit You Do Not Draw

Every scenario above assumes you extract everything each year - the worst case for a company. A sole trader is taxed on all profit as it arises, drawn or not. A company pays only Corporation Tax on profit it retains: at £30,000-£50,000 of taxable profit that is 19% now, with dividend tax deferred until you choose to extract - possibly in a lower-income year, possibly never as dividends at all (employer pension contributions are a common exit that also reduces the Corporation Tax bill). Deferral is not avoidance - the dividend tax is still waiting - but if you reliably spend less than you earn, retention is where the company structure starts winning the arithmetic again.

How to Switch, If You Decide To

1. Incorporate at Companies House. Your name and registered office address become public - use an accountant's or registered-office service address if that matters to you.
2. Tell HMRC on both sides. Register the company for Corporation Tax; report the end of self-employment, and file a final Self AssessmentHMRC's system for reporting income and gains not taxed at source. The online return and payment deadline is 31 January after the tax year ends. covering your sole-trade period up to cessation.
3. Move the business across. Contracts, insurance and a company bank account (legally required - the money is the company's). If you are VAT-registered, transfer or re-register the registration - the VAT registration threshold mechanics work the same either side of the switch.
4. Set up PAYE if you will pay yourself a salary, and decide the salary and dividend split.
5. File on the company cycle. First annual accounts to Companies House and a Company Tax Return to HMRC for the first accounting period.

At a Glance: Key Differences