It’s the first big decision most founders make — and in 2026/27 the old rule that “a company always saves tax” no longer holds. Here’s how the two structures really compare, with worked numbers.
Two structures, two very different setups
As a sole trader, you and the business are the same legal person. Your profits are simply your income: you register for Self Assessment (by 5 October in your business’s second year), keep records, and pay Income Tax and National Insurance on what you make.
A limited company is a separate legal entity. The company itself pays Corporation Tax on its profits, and you take money out as a salary through payroll, dividends, or a mix of both. Setting one up costs £100 at Companies House and is usually registered within 24 hours.
The 2026/27 rates that matter
- Sole traders pay Income Tax at 20% on profits between £12,570 and £50,270 (40% above that, 45% over £125,140), plus Class 4 National Insurance at 6% on profits over £12,570 and 2% above £50,270.
- Companies pay Corporation Tax at 19% on profits of £50,000 or less and 25% above £250,000, with marginal relief in between. Any salary goes through PAYE, with employer’s National Insurance at 15% on salaries above the £5,000 threshold.
- Dividends come from after-tax profits, carry a £500 tax-free allowance each year, and are then taxed at 10.75% for basic-rate taxpayers, 35.75% for higher-rate and 39.35% for additional-rate.
The real numbers: £35,000 and £70,000 of profit
Let’s model a one-owner business taking everything as income. In the company version, the owner takes a £12,570 salary with the rest as dividends, with the small employer’s NI bill (about £1,136) covered by the £10,500 Employment Allowance most one-person companies can claim.
£35,000 of profit
- Sole trader: Income Tax of £4,486 plus Class 4 NI of £1,346 — keeping about £29,168.
- Limited company: Corporation Tax of £4,262 and dividend tax of £1,899 — keeping about £28,839.
£70,000 of profit
- Sole trader: Income Tax of £15,432 plus Class 4 NI of £2,657 — keeping about £51,911.
- Limited company: Corporation Tax of £11,469 (marginal relief applies above £50,000) and dividend tax of £6,952 — keeping about £51,579.
The gap is roughly £330 at both levels — in the sole trader’s favour. Shift profits up or down and the picture barely moves: for a one-owner business that takes everything out, the two routes now finish within a few hundred pounds of each other. Ten years ago incorporating could save thousands a year; today’s higher dividend rates, the 25% rate above £50,000 of profits and employer’s NI have closed the gap.
Insight — tax alone no longer decides this. When the tax outcome is a near tie, choose on liability, credibility, how you’ll pay yourself and how you want to run the business — then revisit the sums each year as profits and rules change.
(Figures assume one owner, the standard Personal Allowance and England, Wales or Northern Ireland rates — Scottish Income Tax differs — with no pension or other income.)
Protection, credibility and paperwork
A company’s biggest practical advantage is limited liability: owners are responsible for business debts only up to the value of their investment, which matters once you sign contracts, hold stock or take on credit. Companies can also apply for business loans and investment, and some agencies and larger clients insist on an Ltd on the invoice.
The trade-off is paperwork: annual accounts and a Company Tax Return for HMRC, a confirmation statement for Companies House, and PAYE if you take a salary. A sole trader’s admin is much lighter — one Self Assessment return and records kept for five years. From 6 April 2026, sole traders and landlords with qualifying income over £50,000 must also keep digital records and send quarterly updates under Making Tax Digital.
So which one should you choose?
A sole trader setup usually fits if you’re testing an idea, running a low-risk service business, or earning side income alongside a job — it’s the simplest structure with the least admin.
A limited company usually fits if the business carries real risk or debt, clients require it, you’re building something to scale or sell, or you want to keep profits in the business, fund a pension through it, or share ownership with family.
And you don’t have to get it perfect first time. Plenty of businesses start as sole traders and incorporate as profits grow — done properly, it’s a clean, routine switch.
Quick answers
Can I switch from sole trader to a limited company later?
Yes — and it’s a common path. You register the company with Companies House, tell HMRC, and file a final Self Assessment return covering the part of the year you traded as a sole trader. Clean bookkeeping makes the switch far smoother.
Do sole traders pay less tax than limited companies?
Not automatically. On the worked numbers above, the totals land within a few hundred pounds when all profit is taken as income. Where owners leave profits in the company or pay into a pension through it, the company route can pull ahead — model your own figures before deciding.
What does it cost to set up a limited company?
£100 to register online with Companies House, usually within 24 hours. Ongoing costs include annual Companies House filings, a Company Tax Return and, if you take a salary, payroll.
Does a limited company really protect me if the business fails?
Partly. Limited liability caps your responsibility for company debts at the value of your investment — but it isn’t a shield for everything: personal guarantees you’ve signed and directors’ legal duties still apply.
Do I need an accountant to make this decision?
You can research the rules yourself, but the right answer depends on your profits, risk and plans. A fixed-fee accountant can model both routes against your real numbers in one conversation.
Get the structure right from day one
Whichever structure you pick, the winner is the one that fits how you actually work — and that stays right as you grow. A Taxora accountant will compare both routes against your real numbers, set the structure up properly and keep it running: all for a fixed monthly fee from £9.99, with a dedicated personal accountant and unlimited support.
Book a free chat with Taxora or browse our services and pricing — and start your business on the right footing.
This article is general information for UK business owners and isn’t financial, legal or tax advice. Rates and rules change — speak to a qualified accountant about your circumstances before acting.