Is a limited company more tax-efficient than a sole trader?

Usually yes once annual profits exceed around £30,000 to £50,000, after which corporation tax plus dividend tax tends to leave the director with more net income than the equivalent self-employed tax position. Below that level the simpler sole-trader structure is typically as efficient on a like-for-like basis, with much less admin.

What tax does a sole trader pay in the UK?

Income tax on profits at the personal rates (20% basic, 40% higher, 45% additional), plus Class 4 National Insurance at 6% (on profits between roughly £12,570 and £50,270) and 2% above that. Class 2 NI was abolished for most sole traders from April 2024. Tax is paid through self-assessment, in two payments on account each January and July.

What tax does a limited company pay in the UK?

Corporation tax on profits at 19% for profits up to £50,000, marginal relief between £50,000 and £250,000, and 25% above £250,000 (from April 2023). The director then pays personal tax on whatever they extract: salary at the usual income tax and NI rates, dividends at 8.75% (basic rate), 33.75% (higher) or 39.35% (additional).

Do I need an accountant?

Sole traders can usually do their own self-assessment with online software (£0 to £200 per year). Limited companies should use an accountant; the rules are more complex, the penalties are higher, and the cost of an accountant (£600 to £1,800 per year for a one-person company) is usually recouped in tax savings.

Limited Company vs Sole Trader Tax (UK 2026): Side by Side

Sole trader tax

A sole trader is self-employed and pays income tax and National Insurance on profits (revenue minus allowable expenses). The personal allowance (£12,570 for 2025/26) is tax-free. Income above that is taxed at the standard personal rates: 20% basic up to £50,270, 40% higher to £125,140, 45% additional above.

National Insurance for sole traders is Class 4 at 6% on profits between £12,570 and £50,270, and 2% above £50,270. Class 2 (previously a flat weekly fee) was abolished for most sole traders from April 2024.

Tax is paid through annual self-assessment, with payments on account due 31 January and 31 July. The first year of trading has a larger January bill because the system collects the prior year plus the first payment on account for the following year.

Limited company tax

A limited company is a separate legal entity. The company earns revenue, pays allowable expenses (including the director’s salary), and pays corporation tax on the remaining profit. For 2025/26: 19% on profits up to £50,000, marginal relief between £50,000 and £250,000, and 25% above £250,000.

The director then extracts money from the company in two main forms: a salary (taxed as employment income with PAYE and National Insurance) and dividends from retained profits (taxed at 8.75% basic, 33.75% higher, 39.35% additional). A typical tax-efficient extraction takes a small salary (often up to the National Insurance threshold) plus dividends.

The first £500 of dividend income is tax- free (the dividend allowance). The director also gets the standard personal allowance on salary.

Worked example 1: profit of £30,000

Sole trader. Personal allowance £12,570; remaining £17,430 taxed at 20% = £3,486 income tax. Class 4 NI: 6% on (£30,000 - £12,570) = £1,046. Total tax £4,532. Net take-home £25,468.

Limited company. Take a salary at £12,570 (no NI on the company side at this level), corporation tax on £17,430 profit at 19% = £3,312. Distribute remaining £14,118 as dividends. Dividend allowance £500 free; £13,618 taxed at 8.75% = £1,191. Total tax £4,503. Net take-home £25,497.

At £30,000 profit, the limited company is marginally more efficient (£29 better off per year), but the extra admin cost (typically £600 to £1,200 per year for an accountant) makes sole trader more practical.

Worked example 2: profit of £60,000

Sole trader. Personal allowance £12,570; £37,700 taxed at 20% = £7,540; £9,730 taxed at 40% = £3,892. Class 4 NI: 6% on £37,700 = £2,262, plus 2% on £9,730 = £195. Total tax £13,889. Net take-home £46,111.

Limited company. Salary at £12,570. Corporation tax on £47,430 profit at 19% = £9,012. Distribute £38,418 as dividends. £500 free, then £37,200 at 8.75% = £3,255 (within the £37,700 basic-rate threshold including the salary), then £718 at 33.75% = £242. Total tax £12,509. Net take-home £47,491.

At £60,000 profit, the limited company is around £1,380 more efficient, comfortably covering the accountancy cost.

Worked example 3: profit of £100,000

Sole trader. Total tax including income tax (£27,432) and NI (£3,257) = £30,689. Net £69,311.

Limited company. Salary £12,570. Corporation tax on £87,430 at marginal relief band (effective rate around 26.5%) = £23,167. Distribute £64,263 as dividends. Around £20,500 of tax at the various dividend rates. Net £64,263 minus dividend tax (£20,500) plus £12,570 salary = £56,333. Plus the salary already taxed (only NI relevant for higher levels of salary). Net take-home roughly £71,000.

At £100,000 profit, the gap widens further in favour of the limited company, particularly if profits can be retained inside the company rather than fully distributed.

When sole trader still wins

Some scenarios where a sole trader remains the better choice: profits below £30,000 (admin cost outweighs tax saving), genuine uncertainty about whether the business will continue (closing a sole trader is easy, closing a company has costs), and situations where you need the income to flow personally each month rather than be retained in the company.

When limited company wins

Above £50,000 profit consistently, when clients require a company contract, when you want to limit personal liability, when you want to retain profits for reinvestment, and when you may bring on additional shareholders. The company formation route through Your Company Formations handles the incorporation, registered office and basic compliance setup. A good accountant on a fixed monthly fee handles the ongoing tax filings.

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Frequently asked questions

Is a limited company more tax-efficient than a sole trader?: Usually yes once annual profits exceed around £30,000 to £50,000, after which corporation tax plus dividend tax tends to leave the director with more net income than the equivalent self-employed tax position. Below that level the simpler sole-trader structure is typically as efficient on a like-for-like basis, with much less admin.
What tax does a sole trader pay in the UK?: Income tax on profits at the personal rates (20% basic, 40% higher, 45% additional), plus Class 4 National Insurance at 6% (on profits between roughly £12,570 and £50,270) and 2% above that. Class 2 NI was abolished for most sole traders from April 2024. Tax is paid through self-assessment, in two payments on account each January and July.
What tax does a limited company pay in the UK?: Corporation tax on profits at 19% for profits up to £50,000, marginal relief between £50,000 and £250,000, and 25% above £250,000 (from April 2023). The director then pays personal tax on whatever they extract: salary at the usual income tax and NI rates, dividends at 8.75% (basic rate), 33.75% (higher) or 39.35% (additional).
Do I need an accountant?: Sole traders can usually do their own self-assessment with online software (£0 to £200 per year). Limited companies should use an accountant; the rules are more complex, the penalties are higher, and the cost of an accountant (£600 to £1,800 per year for a one-person company) is usually recouped in tax savings.

Worked examples use 2025/26 UK rates and are illustrative only. Tax positions depend on personal circumstances (pension contributions, salary sacrifice, dividend timing, marriage allowance). Take advice from an accountant before deciding on structure.

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