Sole Trader vs Limited Company: Tax Comparison UK 2025/26

A limited company typically pays less total tax than a sole trader on the same profit, but the gap depends on how much you earn, how you extract money from the company, and what you spend on accountancy. For 2025/26, the tax difference starts to become meaningful around £30,000 to £35,000 in annual profits and widens as income rises.

This guide compares the two structures purely on tax: income tax, National Insurance, corporation tax and dividend tax. It includes worked examples at three profit levels and shows where the savings come from. Use our sole trader vs limited company calculator to model your own figures, or read our broader sole trader vs limited company guide for liability and admin considerations beyond tax.

How sole trader tax works in 2025/26

As a sole trader, your business profit is your personal income. You file a self-assessment tax return each year and pay income tax on profits above the personal allowance of £12,570. The basic rate of 20% applies on income between £12,571 and £50,270. The higher rate of 40% applies between £50,271 and £125,140. Anything above £125,140 is taxed at 45%.

On top of income tax, sole traders pay Class 4 National Insurance. For 2025/26 this is 6% on profits between £12,570 and £50,270, and 2% on profits above that threshold. Class 2 National Insurance was abolished from April 2024, so there is no flat weekly charge, though you can still make voluntary Class 2 contributions to protect your state pension record if your profits are very low.

The combined effect means a sole trader on £50,000 profit pays roughly £7,540 in income tax and around £4,960 in Class 4 NI, leaving approximately £37,500 take-home before any other deductions. At £80,000 profit the bill rises sharply because a large slice falls into the 40% band and NI continues at 2% on the excess.

How limited company tax works in 2025/26

A limited company is taxed separately from you as an individual. The company pays corporation tax on its profits. For 2025/26, the small profits rate is 19% on profits up to £50,000. The main rate is 25% on profits above £250,000. Between £50,000 and £250,000, marginal relief applies so the effective rate rises gradually rather than jumping straight to 25%.

Once corporation tax is paid, you extract money from the company as salary, dividends, or a combination. Most small company directors use a low salary set at the personal allowance (£12,570) or the National Insurance primary threshold, plus dividends for the remainder. Dividends are not subject to employee or employer National Insurance, which is a significant part of the tax saving.

Dividends above the £500 dividend allowance are taxed at 8.75% in the basic rate band, 33.75% in the higher rate band, and 39.35% in the additional rate band. Our dividend tax UK guide explains how these rates interact with your salary and personal allowance in detail.

Side-by-side comparison at £30,000 profit

At £30,000 annual profit, the tax difference between the two structures is modest. A sole trader pays income tax of roughly £3,486 on profits above the personal allowance, plus Class 4 NI of approximately £1,046. Total tax and NI is around £4,532, giving take-home of about £25,468.

A limited company on the same profit pays corporation tax at 19%, which is £5,700. That leaves £24,300 inside the company. If the director takes a £12,570 salary (using the personal allowance) and dividends of £11,730, the dividend tax bill is roughly £985 after the £500 allowance. Employer National Insurance on the salary adds approximately £1,136 at the 2025/26 rate of 15% above the £5,000 secondary threshold.

Total tax across corporation tax, income tax, dividend tax and employer NI comes to roughly £7,821. Take-home is approximately £22,179. At this level the sole trader actually keeps more, because the employer NI and accountancy costs erode the limited company advantage. This is why most advisers suggest incorporation becomes worthwhile around £30,000 to £35,000 only after accounting fees are factored in.

What changes the calculation at lower profits

Below £25,000 profit, the limited company structure rarely saves money once you include accountancy fees of £800 to £1,500 per year. The corporation tax saving is small, employer NI eats into the benefit, and you still need to run payroll and file company accounts. For someone testing a business idea or working part-time, sole trader status is almost always the cheaper option on tax alone.

Side-by-side comparison at £50,000 profit

At £50,000 profit the picture shifts. A sole trader pays income tax of approximately £7,540 and Class 4 NI of around £4,960, totalling £12,500 in tax and NI. Take-home is roughly £37,500.

The limited company pays corporation tax of £9,500 at 19%, leaving £40,500 to distribute. With a £12,570 salary and £27,930 in dividends, dividend tax is approximately £2,395 after the allowance. Employer NI on the salary is around £1,136. The director's personal take-home after salary and dividend tax is approximately £36,969, but the critical difference is that dividends are not subject to employee National Insurance.

A sole trader on the same profit pays £4,960 in Class 4 NI alone. The limited company director avoids that charge entirely by taking dividends instead of salary. Once you account for the lower combined rate of corporation tax plus dividend tax versus income tax plus Class 4 NI, the net saving at £50,000 is approximately £4,000 to £5,000 per year before accountancy fees.

Side-by-side comparison at £80,000 profit

At £80,000 profit the limited company advantage grows substantially. A sole trader pays income tax of roughly £19,432 and Class 4 NI of approximately £5,554, totalling around £24,986. Take-home is about £55,014.

The limited company pays corporation tax of approximately £17,000 (blended rate between 19% and 25% due to marginal relief), leaving £63,000 inside the company. A typical extraction of £12,570 salary plus £50,430 dividends results in dividend tax of roughly £5,200 to £6,800 depending on how much falls into the higher rate band. Employer NI adds about £1,136. Total tax across all layers is approximately £24,000 to £25,000, but take-home for the director is around £55,000 to £58,000.

The annual saving at this level can reach £8,000 to £12,000, making incorporation a clear financial decision for most people earning at this level, even after £1,500 in accountancy fees. The saving comes primarily from avoiding Class 4 NI on profits above £50,270 and from paying corporation tax at 19% to 25% rather than income tax at 40%.

Leaving profit in the company

One advantage sole traders do not have is the ability to leave money inside a limited company and only pay corporation tax on it. If you earn £80,000 but only need £45,000 for living costs, you can leave £35,000 in the company, paying just corporation tax now and deferring personal tax until you withdraw it later. This is a legitimate tax planning tool that can reduce your overall bill in years when profits spike.

National Insurance: the hidden difference

National Insurance is where the limited company structure gains its biggest edge. Sole traders pay Class 4 NI at 6% on all profits between £12,570 and £50,270. On £50,000 profit that is nearly £5,000 in NI alone. Limited company directors who take most of their income as dividends pay no employee NI on those dividends.

The trade-off is employer NI on any salary the company pays. From April 2025, employer NI is 15% on earnings above the £5,000 secondary threshold. On a £12,570 salary that costs the company roughly £1,136 per year. This is still far less than the Class 4 NI a sole trader would pay on the equivalent profit.

Be careful about setting your salary too low. To earn a qualifying year for the state pension you need earnings at or above the lower earnings limit of £6,396 for 2025/26. Most directors set salary at £12,570 to maximise pension credits while keeping NI minimal. Taking zero salary saves a small amount of tax but can cost you state pension entitlement worth over £11,500 per year at current rates.

Costs that reduce the limited company saving

Tax savings are only part of the picture. A limited company typically costs £800 to £2,500 per year in accountancy fees for annual accounts, corporation tax returns, payroll, and confirmation statements. Companies House charges £34 per year for the confirmation statement (or £50 if filed on paper).

You may also need separate business bank accounts, accounting software, and more time spent on administration. If the tax saving is £4,000 and accountancy costs £1,200, the net benefit is £2,800. That is still worthwhile for most people at £50,000 profit, but it is worth calculating properly rather than assuming incorporation is always cheaper.

Some costs are tax-deductible for both structures, but the limited company claims them against corporation tax while the sole trader claims them against income tax. The relief is broadly equivalent, though the timing of relief can differ slightly.

When sole trader tax is actually better

Sole trader status wins on tax simplicity and sometimes on total cost at lower income levels. If your profits are under £25,000 and likely to stay there, the administrative and accountancy costs of a limited company usually outweigh any tax saving. If you have no other income and your profits sit just above the personal allowance, the income tax bill is small either way.

Sole traders also have a simpler path for mortgage applications in some cases. Many lenders want two to three years of self-assessment returns, and sole trader accounts are often easier to present than company accounts plus personal tax returns. If you plan to buy a property in the next year, discuss your structure with a mortgage broker before incorporating.

If you are inside IR35 as a contractor, the tax comparison changes entirely because you are treated as an employee for tax purposes regardless of structure. Our IR35 guide covers this separately, but the short version is that IR35 largely removes the tax advantage of a limited company.

How to run your own comparison

The exact figures depend on your profit level, how much salary versus dividends you take, whether you have other income, and your accountancy costs. A £2,000 difference in assumptions can change the recommendation entirely.

Our sole trader vs limited company calculator models both structures using 2025/26 rates for income tax, Class 4 NI, corporation tax, employer NI, and dividend tax. Enter your expected annual profit and it shows estimated take-home for each option side by side.

For a broader look at liability, administration, and when to switch structures, read our sole trader vs limited company UK guide. For the dividend extraction strategy that most limited company directors use, see the dividend tax UK guide. Neither article replaces personalised tax advice, but together they give you a solid basis for the conversation with your accountant.