Sole Trader vs Limited Company in 2026/27: Does Going Limited Still Save Tax?

For years the advice was simple: once your profit passes about 30,000 to 40,000 pounds, set up a limited company and pay yourself a small salary plus dividends. On 2026/27 tax rates that advice is out of date. If you take all of your profit out of the business, being a sole trader now leaves you with more money at every profit level we tested. A company still saves tax, but only when you leave some of the profit in it.

This article sets out the numbers, explains what changed, and gives a checklist for deciding. If you want to try your own figures, use our sole trader vs limited company calculator.

The short answer

• You need all the profit to live on: stay a sole trader. It is cheaper in tax and in running costs.
• Your profit is well above what you need: a limited company starts to win, because the surplus stays in the company at Corporation Tax rates of 19% to 25% rather than being taxed at 40%.
• You want to put large sums into a pension: a company makes this more efficient, because employer contributions avoid National Insurance as well as tax.
• You need limited liability or work with clients who insist on a company: those can outweigh the tax either way.

Why the old rule of thumb no longer works

The saving from a limited company came from one thing: dividends carry no National Insurance and used to be taxed lightly. Over the past decade that gap has been closed step by step:

• 2016: the old dividend tax credit was replaced with a 5,000 pound allowance and new dividend rates.
• 2018 to 2024: the dividend allowance was cut to 2,000, then 1,000, then 500 pounds.
• 2022: dividend rates rose by 1.25 percentage points.
• 2023: Corporation Tax rose from 19% to 25% for profits above 250,000 pounds, with marginal relief from 50,000 pounds.
• 2025: employer's National Insurance rose to 15% and the threshold fell to 5,000 pounds, which affects even a director's small salary.
• 2026: dividend rates rose again by two points to 10.75% and 35.75%, following the Autumn Budget 2025.

Meanwhile self-employed National Insurance went the other way: Class 4 fell to 6% and Class 2 is no longer compulsory. Put together, the advantage has disappeared for anyone drawing out everything.

The numbers if you take everything out

These figures compare a sole trader with a director who pays themselves a 12,570 pound salary and takes all remaining profit as dividends. We have included 1,000 pounds a year of extra running costs for the company, such as higher accountancy fees and Companies House filing, and assumed no Employment Allowance, as for most one-person companies.

Profit	Sole trader keeps	Company, drawing everything	Difference
30,000	25,468	23,681	Sole trader +1,787
40,000	32,868	30,910	Sole trader +1,958
50,000	40,268	38,139	Sole trader +2,129
60,000	46,111	45,368	Sole trader +743
75,000	54,811	52,931	Sole trader +1,880
100,000	69,311	64,737	Sole trader +4,574
150,000	92,040	84,803	Sole trader +7,237

Even without the extra running costs, the company falls short at every level. At 40,000 pounds of profit the sole trader keeps about 32,900 pounds against 31,600 for the director.

When a limited company still wins

The picture changes when you do not need every pound. Profit left in a company has paid Corporation Tax only. As a sole trader, the same profit is taxed at your marginal rate whether you spend it or not.

Here is the same comparison for a director who takes out 50,270 pounds a year, enough to use the whole basic rate band, and leaves the rest in the company:

Profit	Sole trader keeps	Company: cash plus money left in	Difference
75,000	54,811	46,271 + 10,366 = 56,637	Company +1,826
100,000	69,311	46,271 + 28,741 = 75,012	Company +5,701
150,000	92,040	46,271 + 65,491 = 111,762	Company +19,722

With these settings, a company starts to come out ahead at around 64,000 pounds of profit. If you only need to draw 40,000 pounds the crossover is around 59,000 pounds, and at 30,000 pounds of drawings it is around 55,000.

Two cautions. First, money left in the company is not yours to spend until you take it out, and dividend tax is due then. The gain comes from deferring that tax, or from taking it in a year when you have spare basic rate band, such as a career break or retirement. Second, the money is exposed to the business's risks while it sits there.

Pensions strengthen the case. A company can pay into your pension as an employer contribution, which is deductible for Corporation Tax and free of National Insurance and income tax. A sole trader's pension contributions get income tax relief but not National Insurance relief.

The reasons that are not about tax

• Limited liability. A company's debts are generally its own, which protects your home and savings if the business fails. Directors can still be personally liable for wrongful trading or personal guarantees.
• Credibility. Some larger clients, agencies and public bodies will only contract with a company.
• Investment. Only a company can issue shares, take SEIS or EIS investment, or bring in a business partner cleanly.
• Admin and privacy. A company files accounts that anyone can read, a confirmation statement every year, a Corporation Tax return and payroll. Directors must also verify their identity at Companies House.
• Taking money out. The money belongs to the company. Dividends need profits to pay them, and borrowing from the company brings director's loan account rules.
• Contractors. If your contracts fall inside IR35, most of the tax advantage of a company disappears anyway.

A quick checklist

A limited company is worth a serious look if most of these apply:

1. Your profit is reliably above 60,000 pounds a year.
2. You need noticeably less than your profit to live on.
3. You want to make regular pension contributions.
4. You want limited liability, or clients ask you to work through a company.
5. You are happy with the extra filing and public accounts.

If you need all the profit, your profit is under about 55,000 pounds, or you prefer simple admin, staying a sole trader is likely to be the better choice for now. Making Tax Digital for Income Tax applies to sole traders with income over 50,000 pounds from April 2026, which adds quarterly updates, but that alone is not a reason to incorporate.

How to switch from sole trader to limited company

1. Form the company at Companies House (see our company formation service). It costs 100 pounds online and usually takes a day.
2. Open a business bank account in the company's name.
3. Register for PAYE so you can pay yourself a salary, and register the company for Corporation Tax within three months of starting to trade.
4. Transfer the business, including equipment, stock and contracts. Goodwill and assets need a sensible valuation, and incorporation relief can defer capital gains.
5. Deal with VAT. If you are VAT registered, the registration can usually transfer to the company.
6. Tell HMRC you have stopped self-employment and file a final Self Assessment return covering the period up to the switch.

What Cloudkeepers can do

As part of our tax advice and planning, we run both scenarios with your real figures, including pension contributions and what you actually need to draw, and tell you plainly whether a company is worth it. If it is, we handle the switch from start to finish. If it is not, we look after your Self Assessment and Making Tax Digital updates as a sole trader. Try the calculator first, then get in touch.