Whether you should be a sole trader or a limited company in 2026/27 depends on your profit level, what you plan to do with the money, how much admin you are willing to take on and how much risk your business carries. A limited company can still save tax at higher profit levels, but the gap has narrowed because dividend tax rates rose by 2 percentage points from April 2026. For many smaller businesses, staying a sole trader is simpler and costs little or nothing extra in tax.
The basic difference
As a sole trader, you and your business are legally the same. You keep the profits, you pay income tax and National Insurance on them through Self Assessment, and you are personally responsible for any business debts.
A limited company is a separate legal entity. It owns the business, pays corporation tax on its profits and is run by its directors. You, as a director and shareholder, then take money out, usually as a combination of salary and dividends, and pay personal tax on what you take. Your personal liability is normally limited to what you have invested, although directors can still be personally liable in some situations, such as personal guarantees or wrongful trading.
How the tax compares in 2026/27
Sole trader
Sole trader profits are taxed as your income, whether you draw the money or leave it in the business.
| Tax | Rate | Applies to profits |
|---|---|---|
| Income tax (basic rate) | 20% | £12,571 to £50,270 |
| Income tax (higher rate) | 40% | £50,271 to £125,140 |
| Income tax (additional rate) | 45% | Over £125,140 |
| Class 4 National Insurance | 6% | £12,570 to £50,270 |
| Class 4 National Insurance | 2% | Over £50,270 |
The Personal Allowance of £12,570 is reduced by £1 for every £2 of income over £100,000 and is lost completely at £125,140. Class 2 National Insurance is no longer compulsory, although you can pay voluntarily to protect certain benefits. Scottish income tax rates are different.
Limited company
A company pays corporation tax on its profits at 19% where they are up to £50,000, and 25% where they are over £250,000. Between those figures, marginal relief applies, which gives an effective rate of 26.5% on profits within the band. These limits are divided between associated companies.
When you take money out as dividends, you then pay dividend tax on top:
| Dividend tax band | Rate from April 2026 |
|---|---|
| Dividend allowance | £500 at 0% |
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
Salary paid to a director is deductible for corporation tax, but attracts employer National Insurance at 15% above £5,000 a year and employee National Insurance at 8% above £12,570. The Employment Allowance, which can reduce employer National Insurance, is not available where the only employee paid above the secondary threshold is a director.
So which pays less tax?
At lower profit levels, the difference is often small, and once you add the extra accountancy and admin costs of running a company, a sole trader may come out ahead. As profits rise, particularly into the higher rate band, a company can become more efficient, especially if you do not need to draw all of the profit each year. Profit left in the company is only taxed at corporation tax rates until it is paid out.
The 2 point increase in dividend rates means the break-even point has moved, so a decision that made sense a few years ago is worth checking again. You can get a feel for the numbers using our sole trader tax calculator and our salary and dividend tax calculator, but a proper comparison should reflect your actual profit, other income and plans.
Admin and running costs
A limited company comes with more paperwork and more public disclosure. You will need to:
- Incorporate at Companies House (£100 online) and complete identity verification for directors and people with significant control
- File a confirmation statement each year (£50 online)
- Prepare statutory accounts and file them within 9 months of the year end
- Pay corporation tax 9 months and 1 day after the year end, and file a CT600 within 12 months
- Run a payroll if you pay yourself a salary
- Keep a clear record of dividends and any money you borrow from the company through a director’s loan account
Sole traders, by contrast, file a Self Assessment return each year. From April 2026, sole traders with turnover (plus any property income) over £50,000 must also follow Making Tax Digital for Income Tax, with quarterly updates. That threshold falls to £30,000 from April 2027 and £20,000 from April 2028. Limited companies are not part of MTD for Income Tax, which some people see as a point in their favour, although the company still has its own reporting duties.
Other factors to weigh up
Tax is only part of the decision. These points often matter just as much:
- Liability and risk. If your work carries a real risk of large claims, or you are taking on premises, staff or significant contracts, limited liability can offer useful protection. Insurance is still important either way.
- Credibility. Some larger clients prefer, or insist on, working with limited companies.
- Retaining profit. If you want to reinvest profits to grow, a company lets you do that at corporation tax rates rather than your personal rates.
- Pension contributions. A company can make employer pension contributions for you, which are usually deductible for corporation tax and free of National Insurance, within the £60,000 annual allowance.
- Bringing in others. Shares make it easier to bring in a business partner, an investor or family members, although the tax rules on sharing income need careful handling.
- Contractors and IR35. If you work through your own company for clients, the off-payroll working rules may affect how much of the tax advantage you actually keep.
- Privacy. Company details, accounts and director information are on the public register.
If you already trade as a sole trader and decide to incorporate, the way you transfer the business matters. There are reliefs that can help when moving assets and goodwill into a company, but they have conditions, so take advice before you switch.
Questions and answers
At what profit level is a limited company worth it?
There is no single figure that applies to everyone. It depends on how much of the profit you need to draw, your other income, whether you can use pension contributions and the extra costs of running a company, so it is best worked out with your own numbers.
Did the dividend tax increase change things?
Yes. Basic and higher rate dividend tax both rose by 2 points from April 2026, to 10.75% and 35.75%. This reduces the advantage of taking profits as dividends, so it is worth reviewing any comparison done before then.
Can I start as a sole trader and switch later?
Yes, and many people do. Starting as a sole trader keeps things simple while the business finds its feet, and you can incorporate later when profits or risk justify it.
Is a limited company more expensive to run?
Usually, yes. There are Companies House fees, statutory accounts, a company tax return and often payroll, so accountancy fees are normally higher than for a sole trader.
Can I pay my spouse through the business?
You can pay a spouse a salary for genuine work at a reasonable rate, whatever your structure. Giving a spouse shares in a company is also possible, but HMRC’s settlements rules can apply, so take advice first.
Does a limited company protect my house?
Limited liability means your personal assets are not usually at risk for company debts. That protection can be lost if you give personal guarantees, for example on a lease or loan, or if you act improperly as a director.
How Digivolve can help
We help business owners in Haywards Heath, Mid Sussex and across the UK make this decision based on real numbers, not rules of thumb. If a company is the right fit, our company formation service gets you set up properly, and our limited company accountants handle the ongoing accounts, tax and payroll. If staying self-employed makes more sense, our sole trader accounts service keeps things simple and MTD-ready.
To compare the options for your business, book a free consultation.
This article is general information for the 2026/27 tax year and is not personal tax advice. Rules can change, so please speak to us about your own situation.