Choosing between sole trader status and a limited company is one of the most consequential decisions a UK self-employed person makes. The 2022-25 tax changes — corporation tax rises, dividend allowance cuts, NI reforms — have substantially narrowed the company advantage. This guide runs the actual numbers at three profit levels in 2026 and explains when each structure wins.
Sole trader: Income Tax (20/40/45%) + Class 4 NI (6% to £50,270, 2% above) + Class 2 NI (£3.45/week if profits >£6,725) on all profits. No separation between you and the business.
Ltd company: Corporation Tax (19% on profits up to £50k, marginal rate to £250k, 25% above) on company profits. Then your personal income tax on whatever you withdraw — typically a small salary plus dividends.
Sole trader: £30k profit. Income Tax £3,486. Class 4 NI £1,046. Class 2 £179. Take-home: £25,289.
Ltd (£12,570 salary + dividends): Corporation Tax on £17,430 = £3,312. Distributable: £14,118. Personal: £500 dividend allowance free + £13,618 dividends @ 8.75% = £1,191. Take-home: £25,609. Saving vs sole trader: just ~£320.
Sole trader: Income Tax £11,432. Class 4 NI £3,202. Take-home: £45,366.
Ltd (£12,570 salary + dividends): Corporation Tax on £47,430 = £9,012. Distributable £38,418. Personal: dividend tax on £37,918 in basic rate band = £3,318. Take-home: £47,670. Saving: ~£2,300.
Sole trader: Income Tax £27,432 + NI £4,946. Take-home: £67,622.
Ltd: Corporation Tax (with marginal relief) ~£18,800 on £87,430. Distributable £68,630. Personal taxes if all withdrawn: ~£11,000. Take-home: ~£70,200. Saving: ~£2,580. Saving rises sharply if profits retained in the company for later years or pension contributions.
Ltd companies file annual accounts and Confirmation Statement at Companies House (public), Corporation Tax return with HMRC, payroll for any salary, and personal Self Assessment. Accountancy fees typically £900-£1,800/year.
Sole traders file just one Self Assessment. Limited liability is the other major Ltd advantage — your personal assets are protected if the business fails. For sole traders, business and personal liabilities aren't separated.
Roughly £30,000-£40,000 profit when you factor in Ltd accountancy costs. Below that, sole trader is usually better. Above £50k, Ltd typically wins.
Yes — sole trader to Ltd is straightforward (incorporate, transfer goodwill/assets). Ltd back to sole trader requires winding up — more complex.
If you contract via your own Ltd to large clients, off-payroll rules can force you to be taxed like an employee — wiping out the Ltd advantage. Get specialist IR35 advice before incorporating for contracting.
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