TAX GUIDE

Sole trader vs limited company: how the tax compares.

A sole trader pays Income Tax and National Insurance on all of the business profit. A limited company pays Corporation Tax, and the owner then pays tax on what they take out. This guide sets out each set of rules for 2026/27 and runs the numbers on two made-up examples.

Figures for the 2026/27 tax year · Last reviewed 21/10/2026

The basic difference

As a sole trader, you and the business are the same person for tax. The profit is your income, whether you take it out of the bank or leave it there. You also have unlimited liability, so you are personally responsible for the business's debts.

A limited company is legally separate from the people who own it. The company pays tax on its own profit. Its owners are responsible for its debts only up to the value of their investment. Money only becomes your personal income when the company pays it to you, usually as a salary or a dividend.

That second point is what drives most of the tax difference. It is also why the answer depends on how much you need to take out each year.

How a sole trader is taxed in 2026/27

Your taxable profit is your income less your allowable expenses. It is added to any other income you have, and taxed through Self Assessment.

Income Tax

These are the rates for England, Wales and Northern Ireland. Scotland has its own bands.

Personal Allowance. The first £12,570 is tax free.
Basic rate, 20%. On income from £12,571 to £50,270.
Higher rate, 40%. On income from £50,271 to £125,140.
Additional rate, 45%. On income over £125,140.

If your adjusted net income is over £100,000, your Personal Allowance goes down by £1 for every £2 above that. It is zero at £125,140.

National Insurance

Class 4. 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270.
Class 2. You do not pay this. If your profits are £7,105 or more, it is treated as paid to protect your National Insurance record. Below that, you can choose to pay voluntarily at £3.65 a week.

How a limited company is taxed in 2026/27

There are two layers. First the company pays tax on its profit. Then you pay personal tax on what it pays you.

Corporation Tax

Small profits rate, 19%. For profits of £50,000 or less.
Main rate, 25%. For profits over £250,000.
Marginal Relief. Between £50,000 and £250,000, you pay at the main rate less a relief worked out with a standard fraction of 3/200. The effect is a rate that rises gradually between the two.

The £50,000 and £250,000 limits are reduced for accounting periods shorter than 12 months, and shared out if the company has associated companies.

Salary

A director's salary is a cost to the company, so it reduces the profit that Corporation Tax is charged on. It is taxed through PAYE like any other wage. For 2026/27:

Employee National Insurance. 8% on earnings between £12,570 and £50,270 a year, and 2% above that.
Employer National Insurance. 15% on earnings above £5,000 a year.
Employment Allowance. Up to £10,500 off the employer's bill. It is not available if the company has one director and that director is the only employee liable for employer National Insurance.

Our guide to paying yourself a director's salary goes into the choice of salary level.

Dividends

Dividends are paid out of profit after Corporation Tax. A company must not pay out more in dividends than its available profits from current and previous years. Each one needs a directors' meeting with minutes and a dividend voucher.

The first £500 of dividends each year is covered by the dividend allowance. Above that, the rates for 6 April 2026 to 5 April 2027 are:

Basic rate band. 10.75%
Higher rate band. 35.75%
Additional rate band. 39.35%

Worked example: £50,000 profit, all taken out

This example is made up. It assumes one owner in England with no other income, a 12-month year, no associated companies, no pension contributions and no student loan. Profit is before paying the owner anything.

As a sole trader. Income Tax is £7,486. That is 20% of £37,430, the profit above the Personal Allowance. Class 4 National Insurance is £2,245.80, which is 6% of the same £37,430. Total tax is £9,731.80, leaving £40,268.20.

As a limited company. The company pays a salary of £12,570. As the only employee, the director cannot use Employment Allowance, so employer National Insurance is £1,135.50. Employee National Insurance and Income Tax on the salary are nil. Profit left is £36,294.50, and Corporation Tax at 19% is £6,895.96. The remaining £29,398.54 is paid as a dividend. After the £500 allowance, dividend tax at 10.75% is £3,106.59. Total tax is £11,138.05, leaving £38,861.95.

In this example the sole trader keeps £1,406.25 more.

Worked example: £100,000 profit

Same assumptions, but profit of £100,000.

As a sole trader. Income Tax is £27,432 and Class 4 National Insurance is £3,256.60. Total tax is £30,688.60, leaving £69,311.40. That tax is due on the whole profit, whether you spend it or leave it in the bank.

As a limited company, taking everything out. After the same £12,570 salary and £1,135.50 employer National Insurance, profit is £86,294.50. With Marginal Relief, Corporation Tax is £19,118.04. Paying the remaining £67,176.46 as a dividend means £14,536.83 of dividend tax, as part falls in the higher rate band. You keep £65,209.63, which is £4,101.77 less than the sole trader.

As a limited company, leaving some in. If you take only £37,700 of dividends, keeping your income inside the basic rate band, dividend tax is £3,999. You have £46,271 personally, and £29,476.46 stays in the company with Corporation Tax already paid. You will pay personal tax on that money if you take it out in a later year.

What the examples show

With 2026/27 rates, taking every penny of profit out of a company each year can cost more tax than staying a sole trader. A one-person company also cannot use Employment Allowance, which makes the salary more costly.

Where a company can help is when you do not need all of the profit straight away. Money left in the company has borne Corporation Tax, but no personal tax yet. That gives you more control over when you pay the second layer of tax. It suits owners who want to build up cash for the business, or whose personal needs are below what the business earns.

Your own numbers will differ. Pension contributions, other income, a spouse who is also a shareholder, living in Scotland and student loans all change the result. Get personal advice before you decide.

Paperwork and deadlines compared

The tax bill is only part of the cost. A company has more to file, and more ways to get it wrong.

Sole trader

Register for Self Assessment once your trading income is more than £1,000 in a tax year
File your online return for 2025/26 by 31 January 2027, and pay what you owe by the same date
Make payments on account by 31 January and 31 July if your last bill was £1,000 or more, unless more than 80% of it was collected at source
Keep records that show your income and expenses

Sole traders may also need to use Making Tax Digital for Income Tax, depending on their income. See our guide on what Making Tax Digital means for the self-employed.

Limited company

File annual accounts with Companies House within 9 months of the accounting reference date
Pay Corporation Tax, usually 9 months and 1 day after the end of the accounting period
File the Company Tax Return within 12 months of the end of the accounting period
Run payroll and send PAYE reports if you pay a salary
File a confirmation statement with Companies House
Record dividends properly, and keep track of any director's loan
Keep company and accounting records, and file your own Self Assessment return if you need to

Directors can be fined, prosecuted or disqualified if they do not meet these duties.

The company's money is not your money

This is the change that catches people out after they incorporate. As a sole trader you can move money from the business account to your own whenever you like. In a company, money you take that is not salary, a dividend or a repaid expense is a director's loan. It must be recorded, and if it is not repaid on time the company can face an extra tax charge. If you owe the company more than £10,000 at any time in the year, it may also count as a benefit in kind.

That makes clean, current books more important. You need to know the profit available before you declare a dividend, and you need to see your director's loan balance before it becomes a problem.

Questions to ask before you decide

How much profit does the business make, and how much of it do you need to live on?
Do you want limited liability for business debts?
Are you happy to run payroll, record dividends and file with Companies House each year?
Will you keep the company's money separate from your own?
Have you had the figures checked against your own circumstances?

If you are still unsure, it can help to read whether you can do your own company accounts and our self-employed accounting guide side by side.