Sole trader or limited company: which leaves you more?

Why the old advice has changed

For years, setting up a company was the usual advice once profits grew. A run of changes has worn most of that advantage away. Corporation tax is now 19% on profits up to £50,000 and up to 25% above it. Employer National Insurance is 15% on salary over £5,000, and a company whose only employee is its director can't claim the Employment Allowance to cover it. And from April 2026 dividends are taxed at 10.75% in the basic-rate band and 35.75% in the higher-rate band.

A sole trader, by contrast, pays Income Tax and Class 4 National Insurance on the profit, and Class 4 is only 6% between £12,570 and £50,270 and 2% above that.

The two routes, compared

Take-home pay in 2026/27 for someone in England with no other income. The company pays its director the most tax-efficient salary (£12,570 at these profits) and the rest as dividends, and has £1,200 a year of extra running costs for an accountant and payroll:

Even with no running costs at all, the company is still about £1,950 behind at £80,000. Profit has to clear corporation tax first, then dividend tax when it reaches you, and for most profit levels those two layers together take more than Income Tax and Class 4 do.

Compare the two on your own profit →

When the company route does better

You don't need all the profit. Money left in a company has only paid corporation tax. On a £100,000 profit, a director who takes a £12,570 salary and £37,000 of dividends takes home £45,646 and leaves £29,294 in the company. That's £74,940 in all, against £69,311 as a sole trader. The catch is that the money in the company isn't yours yet. Dividend tax is due when you take it out, so this delays the tax rather than removing it, unless you can take it out later in a year when your income is lower.

Pension contributions. A company can pay into your pension as an employer contribution, before corporation tax and with no National Insurance. A sole trader gets Income Tax relief on personal contributions, but no National Insurance relief. On an £80,000 profit with £10,000 going into a pension either way, the gap narrows from £2,513 to £1,235.

Scotland. Scottish Income Tax rates are higher on middle incomes, but dividends are taxed at UK rates wherever you live. On a £60,000 profit, a company comes out about £860 ahead for a Scottish taxpayer.

It isn't only about tax

Liability. A company's debts are its own, so your personal assets are usually protected if it fails. A sole trader is personally liable for everything the business owes. Lenders and landlords often ask directors for a personal guarantee, though, which takes away some of that protection.

Paperwork. A company files accounts and a confirmation statement with Companies House, a corporation tax return, payroll for your salary, and your own Self Assessment return. A sole trader files one tax return a year, plus quarterly updates under Making Tax Digital once their self-employment and property income is over £50,000 (£30,000 from April 2027).

Privacy. Directors' names and the company's accounts are on the public register.

IR35. If you contract through your company and the work would be employment without it, the off-payroll rules tax the income much like a salary, and most of any saving disappears.

Getting money out. A company's money isn't yours to spend. It comes out as salary, dividends (only from profits) or a director's loan, and each has its own rules.

Making the decision

Look at the profit you expect over the next few years, not just this one, and be honest about how much you'll need to live on. If you'll take out nearly everything, staying a sole trader is usually simpler and cheaper. If you'll leave a meaningful amount in the business or pay heavily into a pension, run the numbers properly, ideally with an accountant who knows your plans.