Sole trader or limited company: how to decide
This is the question we are asked more than any other. The honest answer is that it depends on your numbers, but the way the decision works is not complicated, and you can get most of the way there yourself.
A sole trader and a limited company are two different legal structures for running a UK business. A sole trader is the individual and the business as one legal person, taxed through Self Assessment. A limited company is a separate legal entity that pays corporation tax on its profits, with the owner taxed separately on the salary and dividends they take out.
Figures are for the 2026/27 tax year. Last checked against gov.uk on 23 August 2026. The sources are on our tax dates and rates page.
The difference in one paragraph
As a sole trader, you and the business are the same legal person. The profit is your income, you pay income tax and National Insurance on all of it through Self Assessment, and you are personally responsible for the debts.
A limited company is a separate legal person. It pays corporation tax on its profits. You then pay tax separately on whatever you take out, usually as a small salary plus dividends. Your personal liability is normally limited to what you have put in.
Where the tax difference comes from
The saving, where there is one, comes from the mix. A sole trader pays income tax and Class 4 National Insurance on the whole profit. A company director pays corporation tax on the profit, then income tax on the dividends, but dividends carry no National Insurance.
That gap narrowed in April 2026, when the dividend ordinary rate rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%. Comparisons written before then overstate the advantage, and a lot of what is still online was written before then.
Employer National Insurance is 15% on earnings above a secondary threshold of £5,000 a year in 2026/27. The classic advice to pay yourself a salary up to the personal allowance now triggers employer National Insurance on most of it, so the old rule of thumb no longer lands where it used to. The Employment Allowance of up to £10,500 covers this for many employers, but not for a company whose only employee is a single director.
The numbers that decide it
All figures are for the 2026/27 tax year and are set out with their sources on our tax dates and rates page.
| Sole trader | Limited company | |
|---|---|---|
| Tax on profit | Income tax at 20%, 40% or 45% | Corporation tax at 19% up to £50,000 of profit, 25% above £250,000, marginal relief between |
| National Insurance | Class 4 at 6% from £12,570 to £50,270, then 2%. Class 2 at £3.65 a week from £7,105 of profit | None on dividends. Class 1 applies to any salary, with employer NI at 15% above £5,000 |
| Tax on money taken out | None. The profit is already taxed | Dividends taxed at 10.75%, 35.75% or 39.35% above a £500 allowance |
| Personal liability | Unlimited. Your own assets are exposed | Normally limited to what you have invested |
| Public filing | Nothing is published | Accounts and directors are on the public register at Companies House |
| Admin | One Self Assessment return | Annual accounts, a corporation tax return, a confirmation statement, and usually payroll and a personal return |
Roughly where the crossover sits
At low profits the company usually loses. The extra accountancy fees, payroll and filing obligations cost more than the tax saved, and you take on public filing you did not have before.
As profits rise, the company structure starts to win, because more of the profit can be taken as dividends rather than as income subject to National Insurance. Exactly where that happens depends on how much you need to draw personally, whether you have other income, whether a spouse is involved, and whether the Employment Allowance is available to you.
Anyone who gives you a single profit figure as the answer is guessing. The crossover moved in April 2026 and it moves again whenever rates change.
How much do you need to take out personally? A company is most efficient when you can leave profit inside it. If you need to draw everything you earn, much of the advantage disappears and the extra admin may not be worth it.
Reasons that have nothing to do with tax
Tax is not always the deciding factor, and for some businesses it is not even the main one.
- Limited liability matters if your trade carries real risk of a claim or of significant debt.
- Some clients, particularly larger companies and public bodies, will only contract with a limited company.
- A company can be easier to bring an investor or a partner into, and easier to sell.
- Company accounts and the names of directors are public. Some people would rather not publish either.
- Being a director brings legal duties and personal responsibility for filing on time, with penalties that start the day a deadline passes.
Changing your mind later
You are not locked in. Moving from sole trader to limited company is common and straightforward, and it is usually done at the start of a tax year or an accounting period to keep things clean.
Going the other way, from a company back to sole trader, is more involved because the company has to be wound up or struck off properly, and there can be tax on any assets or retained profit coming out. Not difficult, but not free either, so it is worth getting the first decision roughly right.
Questions people ask about this
Is a limited company always more tax efficient than being a sole trader?
No. At lower profits the extra accountancy, payroll and filing costs usually outweigh the tax saved. The company structure tends to win as profits rise and where you can leave money in the business rather than drawing it all. The gap narrowed in April 2026 when dividend rates rose by two percentage points, so older comparisons overstate the advantage.
At what profit should I set up a limited company?
There is no single figure, and anyone quoting one is guessing. It depends on how much you need to draw personally, your other income, whether a spouse or partner is involved, and whether the Employment Allowance is available to you. The crossover point also moves whenever rates change, and it moved in April 2026. Work it out on your own numbers rather than a rule of thumb.
Do I pay National Insurance on dividends?
No. Dividends do not attract National Insurance, which is where most of the potential saving in a company structure comes from. They are taxed at 10.75%, 35.75% or 39.35% in 2026/27 depending on your income, above a £500 dividend allowance.
Will my company accounts be public?
Yes. A limited company must file accounts at Companies House and they are publicly viewable, as are the names of the directors and the registered office address. Small companies can file simplified accounts, which show less, but the filing itself is still public. A sole trader publishes nothing.
Can I switch from sole trader to a limited company later?
Yes, and it is common. The move is usually timed to the start of a tax year or accounting period to keep the records clean. Going back the other way is more involved, because the company has to be closed down properly and there may be tax on assets or retained profits coming out.
Does being a limited company protect me personally?
Usually, but not absolutely. A limited company is a separate legal person, so business debts are normally the company’s rather than yours. That protection falls away where you have given a personal guarantee, which lenders and some landlords require, and where a director has acted improperly.
This guide is general information about how the rules work, not advice for your circumstances, and it does not cover every rule or exception. The right answer depends on your own figures. Speak to us, or another qualified adviser, before deciding.
Want this worked out on your actual numbers?
We will run the comparison on your figures and tell you plainly which way it falls, including when the answer is to leave things as they are. The first consultation is free.
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