Sole trader or limited company: the tax comparison

Q: Which taxes apply to each structure in 2026 to 2027?

ItemSole traderCompany with owner director Tax on profitIncome tax: 20% to £50,270, 40% to £125,140, 45% aboveCorporation Tax: 19% up to £50,000, 25% above £250,000, marginal relief between National InsuranceClass 4: 6% from £12,570 to £50,270, 2% aboveOn salary: employer 15% above £5,000; employee 8% from £12,570 to £50,270 Tax on extractionNone, profit is taxed as earnedDividends: £500 allowance, then 10.75%, 35.75% or 39.35% The Personal Allowance is £12,570, reduced by £1 for every £2 of adjusted net income over £100,000. Between £50,000 and £250,000 of company profit, HMRC's Company Taxation Manual (CTM03925) shows marginal relief produces an effective rate of 26.5% on the slice of profit in that range. Dividend rates went up two points from 6 April 2026: HMRC's 2025 to 2026 return guide gives 8.75%, 33.75% and 39.35%, against 10.75%, 35.75% and 39.35% now. For the qualitative differences such as liability, privacy and admin, see sole trader vs limited company.

Q: How was the comparison worked out?

Illustration only. The figures assume one owner in England with no other income, profit before any owner pay as shown, and all profit extracted in the year. The company pays a salary of £12,570, which uses the Personal Allowance with no employee National Insurance but costs £1,136 of employer contributions above the £5,000 secondary threshold; that cost and the salary are deductible for Corporation Tax. The rest is paid as a dividend. The Employment Allowance is not claimed, because GOV.UK says a company whose only director is the only employee paid above the secondary threshold cannot claim it. In each case a £12,570 salary beat a £5,000 salary. Accountancy fees and other running costs are ignored. Salary choices are explained in best director salary for 2026 to 2027.

Q: How do the totals compare at different profit levels?

ProfitSole trader: income tax and Class 4Company: all taxes, full extractionExtra cost of the company £30,000£4,532£5,597£1,065 £50,000£9,732£11,138£1,406 £80,000£22,289£24,235£1,946 £120,000£43,089£45,346£2,257 At £50,000, the sole trader pays income tax of £7,486 and Class 4 of £2,246. The company pays employer National Insurance of £1,136 and Corporation Tax of £6,896, leaving a dividend of £29,399 on which the owner pays £3,107. The owner keeps £40,268 as a sole trader and £38,862 through the company.

For 2026 to 2027, a one person business that draws out all its profit pays less tax and National Insurance as a sole trader than through a limited company at every profit level modelled here, from £30,000 to £120,000, because dividend tax rates rose in April 2026. A company only comes out ahead when profit is left in it, taxed at 19% to 26.5% instead of 40% or more, or when other facts such as an extra employee or the Personal Allowance taper change the picture.

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Which taxes apply to each structure in 2026 to 2027?

Item	Sole trader	Company with owner director
Tax on profit	Income tax: 20% to £50,270, 40% to £125,140, 45% above	Corporation Tax: 19% up to £50,000, 25% above £250,000, marginal relief between
National Insurance	Class 4: 6% from £12,570 to £50,270, 2% above	On salary: employer 15% above £5,000; employee 8% from £12,570 to £50,270
Tax on extraction	None, profit is taxed as earned	Dividends: £500 allowance, then 10.75%, 35.75% or 39.35%

The Personal Allowance is £12,570, reduced by £1 for every £2 of adjusted net income over £100,000. Between £50,000 and £250,000 of company profit, HMRC’s Company Taxation Manual (CTM03925) shows marginal relief produces an effective rate of 26.5% on the slice of profit in that range. Dividend rates went up two points from 6 April 2026: HMRC’s 2025 to 2026 return guide gives 8.75%, 33.75% and 39.35%, against 10.75%, 35.75% and 39.35% now. For the qualitative differences such as liability, privacy and admin, see sole trader vs limited company.

How was the comparison worked out?

Illustration only. The figures assume one owner in England with no other income, profit before any owner pay as shown, and all profit extracted in the year. The company pays a salary of £12,570, which uses the Personal Allowance with no employee National Insurance but costs £1,136 of employer contributions above the £5,000 secondary threshold; that cost and the salary are deductible for Corporation Tax. The rest is paid as a dividend. The Employment Allowance is not claimed, because GOV.UK says a company whose only director is the only employee paid above the secondary threshold cannot claim it. In each case a £12,570 salary beat a £5,000 salary. Accountancy fees and other running costs are ignored. Salary choices are explained in best director salary for 2026 to 2027.

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From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.

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How do the totals compare at different profit levels?

Profit	Sole trader: income tax and Class 4	Company: all taxes, full extraction	Extra cost of the company
£30,000	£4,532	£5,597	£1,065
£50,000	£9,732	£11,138	£1,406
£80,000	£22,289	£24,235	£1,946
£120,000	£43,089	£45,346	£2,257

At £50,000, the sole trader pays income tax of £7,486 and Class 4 of £2,246. The company pays employer National Insurance of £1,136 and Corporation Tax of £6,896, leaving a dividend of £29,399 on which the owner pays £3,107. The owner keeps £40,268 as a sole trader and £38,862 through the company.

Why does the company cost more when everything is drawn out?

Look at each extra £100 of profit. A basic rate sole trader pays £20 income tax and £6 Class 4, £26 in total. Through a company paying the 19% rate, £19 goes in Corporation Tax and 10.75% of the remaining £81 in dividend tax, about £27.71. In the higher rate band the sole trader pays £42 (40% plus 2%), while the company route costs £19 plus 35.75% of £81, about £47.96, rising to about £52.78 where marginal relief pushes the company’s rate to 26.5%. The gap that once favoured dividends has closed. The detailed salary and dividend mix is in salary or dividends, and the rate band in marginal relief.

When does a company come out ahead?

The main case is retention. A sole trader is taxed on all profit whether drawn or not; a company owner pays personal tax only on what is extracted.

Illustration only. With £80,000 of profit, the owner takes a £12,570 salary and dividends of £37,700, just filling the basic rate band, and leaves the rest in the company. Employer National Insurance is £1,136, Corporation Tax £13,818 and dividend tax £3,999, a total of £18,953 against £22,289 for the sole trader. The owner has £46,271 in hand and £14,776 stays in the company. That retained profit will meet dividend tax when it is eventually drawn, so the saving depends on drawing it later at a lower rate, or using it for investment in the business.

Other situations can tip the balance:

The Personal Allowance taper. A sole trader with profit between £100,000 and £125,140 loses allowance as profit rises; a company owner can hold income below £100,000 by leaving profit in the company. See Personal Allowance tapering.
Another employee. If the owner is not the only employee paid above the secondary threshold, the Employment Allowance of £10,500 for 2026 to 2027 can absorb employer contributions, which removes the £1,136 cost in the figures above. See the Employment Allowance explained.
Two shareholders. Spouses who both own shares can each use their own allowance and bands, subject to the settlements rules.

What else should go into the decision?

Tax is only one column. A company gives limited liability but brings accounts at Companies House, a Corporation Tax return, payroll and the director’s own return, all of which add fees that would eat into the small savings above. Trading losses also behave differently: a sole trader can set a loss against other income, while a company’s loss stays in the company (see can company losses reduce a director’s tax). Moving an existing trade into a company can trigger capital gains on goodwill, which incorporation relief may defer.

What mistakes come up most often?

Relying on comparisons made before April 2026, when dividend rates were two points lower.
Comparing a sole trader’s total tax with a company that keeps profit, without counting the dividend tax still to come.
Assuming the Employment Allowance is available to a company whose only employee is its sole director.
Ignoring marginal relief, which makes company profit between £50,000 and £250,000 more expensive than the headline rates suggest.
Leaving out the extra running costs of a company.
Using these figures for a Scottish taxpayer, whose income tax bands differ.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.