Sole Trader or Limited Company? What the 2026/27 Numbers Say

The question every growing sole trader asks

It is October. The 5 October deadline for telling HMRC you are self-employed has just gone, the first Self Assessment reminders are landing, and a self-employed electrician in Bristol, three years in, is looking at a profit that will come in near £50,000 for 2026/27. A main contractor has asked whether he is "Ltd", and a mate at the wholesaler swears going limited saved him thousands. So he types the question everyone types: sole trader or limited company?

At 2026/27 rates, if he takes every pound out, a one-person company would leave him about £1,406 a year worse off than staying a sole trader, before he pays anyone to prepare its accounts. That is not the end of the argument, because a company can still be the right call and below is exactly when, but it is the opposite of what most advice implies, and it is why this guide starts with numbers.

What is the difference between a sole trader and a limited company?

A sole trader is the business. A limited company is a separate legal person with its own money, debts and tax. That is the whole of sole trader vs limited company in two sentences, and almost everything else follows from it. In GOV.UK's words, as a sole trader "you are personally responsible for all of the debts of the business", while a limited company "is legally separate from the people who own it", and its owners are responsible for its debts "only up to the value of their financial investment" (GOV.UK, business structures). Whether you are weighing up limited or sole trader, the comparison runs like this:

A partnership is the third common structure, where each partner pays tax on their share of the profits; it is outside the scope of this guide.

Self-employed vs sole trader: are they the same?

Not quite. Self-employed is a tax status; sole trader is a business structure. As a sole trader you are classed as self-employed, and partners work for themselves too. A company owner is different: GOV.UK says that if you run a limited company you are not self-employed, "even if you're the owner and sole employee". A director is an officer of the company and is paid through its payroll and dividends. You are probably running a business, rather than working as an employee, if you take responsibility for its success or failure, have several customers at the same time, decide how, where and when you work, provide your main equipment and charge an agreed fixed price.

Sole trader vs limited company calculator: take-home at eight profit levels

Here is the sole trader vs limited company calculation done for you at 2026/27 rates. "Profit" means profit before paying yourself.

England, Wales or Northern Ireland, 2026/27. One owner who is the only director and only employee (so no Employment Allowance); salary £12,570; every pound of post-tax profit paid out as dividends in the same year; no other income, pension contributions or student loan; Class 2 treated as paid for the sole trader; no company running costs included. The rates are GOV.UK's; the arithmetic is ours.

At £50,000 the sole trader pays 20% Income Tax on £37,430 (£7,486) and 6% Class 4 on the same amount (£2,245.80), keeping £40,268. The company pays employer National Insurance of 15% on the salary above £5,000 (£1,135.50), Corporation Tax at 19% on the £36,294.50 left (£6,895.96), and pays £29,398.54 out as dividends. The salary uses the Personal Allowance, the first £500 of dividends is tax-free and the rest is taxed at 10.75% (£3,106.59), so the owner keeps £38,862.

The company never pulls ahead; the closest it gets is around £60,500, where the two are level to within a pound. The old advice to "go limited at £30,000" belongs to different rates. Employer National Insurance rose from 13.8% above £9,100 in 2024/25 to 15% above £5,000 from 2025/26, and dividend tax rose from 8.75% to 10.75% at the basic rate, and from 33.75% to 35.75% at the higher rate, from 6 April 2026 (GOV.UK, tax on dividends). On last year's dividend rates the gap at £50,000 was £828; the April 2026 rise took it to £1,406. A £12,570 salary beat £5,000, £6,708 and £9,100 at every level up to £100,000 in our runs; near £150,000 a £5,000 salary does slightly better.

Run your own figures with our self-employed tax calculator for the sole trader side, and the corporation tax calculator and dividend tax calculator for the company side.

When a limited company does save tax

Profit you leave in the company. A sole trader pays tax on all the profit in the year it is made, drawn or not. A company pays Corporation Tax on its profit, but no dividend tax until the money is paid out. At £80,000 profit:

The saving is a deferral, not a cancellation. If the £17,476 is paid out in a later year inside the basic rate band, it costs about £1,879 at 10.75%, leaving £15,598, or £59,459 in total against the sole trader's £57,711, but only if you can wait and your later income stays low. Spreading dividends across years, staying inside the basic rate band and below the £100,000 point where the Personal Allowance starts to taper, is the real lever, and it is one a sole trader does not have. Corporation Tax itself is 19% on profits under £50,000, 25% over £250,000, and in between the main rate less marginal relief (GOV.UK, Corporation Tax rates). Those limits are divided by the number of associated companies and cut for short accounting periods, so a second company changes the sums.

Scotland. A Scottish sole trader pays Scottish Income Tax on trading profit (42% from £43,663 and 45% from £75,001), but dividends are taxed at the same rates as the rest of the UK. On our model the company route comes out ahead in Scotland from about £50,000 to £86,000 of profit (by up to about £1,770, near £60,000) and from about £105,000 to £145,000 (by up to about £3,400, near £125,000), and behind elsewhere, for example by £802 at £100,000.

When there are employees. A company with other staff on its payroll can usually claim the £10,500 Employment Allowance against employer National Insurance. A company whose only director is the only employee paid above the secondary threshold cannot.

Advantages and disadvantages of a sole trader

Advantages of a sole trader

• The simplest business structure to set up and keep records for, with no registration fee: you register for Self Assessment once you earn over £1,000 in a tax year.
• Trade under your own name or a trading name.
• All the profit is yours after tax, with no rules about taking money out, and nothing on a public register.
• A loss can be set against your other income of the same or the previous year, and losses in the first 4 years of trading can be carried back further.
• At most profit levels, more take-home pay than the company route.

Disadvantages of a sole trader

• Unlimited liability: you are personally responsible for all the debts of the business.
• Tax on all the profit whether you draw it or not, at 20%, 40% or 45% plus Class 4 at 6% and 2%.
• Payments on account, each usually half of last year's bill, due on 31 January and 31 July, can make the second year a cash shock.
• Making Tax Digital for Income Tax quarterly updates once qualifying income passes £50,000 (from 6 April 2026), £30,000 (2027) or £20,000 (2028): see our guide to Making Tax Digital for sole traders.
• Some clients and investors prefer to deal with a company, and you cannot sell shares in a sole trader business.

What a limited company gives you

Limited liability is the headline: owners are responsible for the company's debts only up to what they invested. A company is a separate legal person that can own assets, sign contracts and carry on beyond your own involvement; shares can be issued or sold to bring in a partner or investor; you choose when to take profit out; and some clients will only contract with a company. It is not a shield from everything: directors can be fined, prosecuted or disqualified if they do not meet their responsibilities, and a lender may ask a director for a personal guarantee.

What are the disadvantages of being an Ltd?

More paperwork, more cost, less privacy, and the money is the company's, not yours.

• Set-up: £100 online or £124 by post, usually registered within 24 hours online.
• Identity verification: a legal requirement for directors since 18 November 2025. Existing directors give their personal code with the next confirmation statement, and a company cannot file its confirmation statement unless all its directors are verified (GOV.UK, verifying your identity).
• A public record: directors' names, personal information and a service address are public (home address and full date of birth are not), and so are the accounts you file.
• Every year: accounts to Companies House within 9 months of the year end (the first accounts 21 months after incorporation); Corporation Tax paid 9 months and 1 day after the period; the Company Tax Return within 12 months; and a confirmation statement at least every 12 months, £50 online.
• Late accounts penalties: £150 up to a month late, £375 up to 3 months, £750 up to 6 months and £1,500 after that, doubled if late two years in a row.
• Rules for taking money out: register the company as an employer to pay a salary; pay dividends only from available profits, declared with minutes "even if you're the only director" and a voucher for each payment; anything else is a director's loan, which must be recorded and has its own tax rules.
• No Employment Allowance if you are the only director and the only employee above the secondary threshold.
• Still to come: from April 2028, postponed from April 2027, Companies House accounts must be filed in iXBRL through software, small and micro companies will have to file a profit and loss account, and abridged accounts end.

You will also usually pay more for a company's year end than for a sole trader's tax return; our guide to whether sole traders need an accountant covers what that work involves.

Do sole traders get a salary?

No. A sole trader takes drawings, and drawings are not a business expense: GOV.UK says allowable expenses "do not include money taken from your business for personal use". You are taxed on profit, not on what you draw. With a profit of £40,000 and drawings of £2,500 a month (£30,000), the tax is still worked out on £40,000: £5,486 Income Tax plus £1,645.80 Class 4, £7,131.80 in all. Set it aside as you go, because payments on account mean the second January bill can include half of the next year's too.

A director, by contrast, can be paid a salary through PAYE. Most owner-directors take a small salary and the rest as dividends: in our model £12,570, which costs the company £1,135.50 in employer National Insurance but carries no employee National Insurance or Income Tax. A salary of at least £6,708, the lower earnings limit, keeps the year counting towards the State Pension.

Going from sole trader to limited company

1. Form the company at Companies House (£100 online), with at least one director aged 16 or over, a UK registered office, a SIC code and your people with significant control (anyone with more than 25% of the shares or votes), and verify your identity. Corporation Tax is usually set up at the same time.
2. Move the business across. If you transfer the business as a going concern for shares, Incorporation Relief can defer Capital Gains Tax into the shares, but for transfers on or after 6 April 2026 it has to be claimed; it is no longer automatic. Take advice where property, goodwill or a large gain is involved.
3. VAT: you can keep the VAT number on a change of legal status with form VAT68; otherwise register the company and cancel the old registration.
4. Tell HMRC you have stopped trading as a sole trader and send a final Self Assessment return for the last period.
5. Open a company bank account, put contracts, invoices and insurance in the company's name, and register as an employer before the first salary.
6. Start the company's own books from its first day, with opening balances for what it took over. The sole trader's books close; they are not converted.

The company is outside Making Tax Digital for Income Tax, so your sole trader quarterly updates stop with the trade, though the final return is still due.

Should I be a sole trader or limited company?

• You need most of the profit to live on, and you are in England, Wales or Northern Ireland: the numbers favour staying a sole trader.
• You want to leave profit in the business, or smooth your income across years: a company can save tax, and the saving grows with what you leave in.
• Your work carries real liability, such as debts, stock, staff or leases: limited liability may matter more than tax.
• Clients or investors require a company, or you plan to bring in a partner by selling shares: a company.
• You are in Scotland with profits of roughly £50,000 to £86,000 or £105,000 to £145,000: run the numbers, the company route can be ahead.
• You do not want public filings, payroll and dividend paperwork: a sole trader.

Choosing a limited company or sole trader is a personal decision, and this is general information, not personal advice: an accountant or tax adviser can model your own figures.

Running either structure in IQ Books

When you create an organisation in IQ Books you choose its legal form, and it sets up a chart of accounts to match: a sole trader gets owner capital and owner drawings; a limited company gets share capital, a director's loan account, Corporation Tax and dividends paid.

• Sole trader books: the self-employment report files your Making Tax Digital for Income Tax quarterly updates to HMRC; IQ Books is on GOV.UK's MTD for Income Tax software list for sole traders' quarterly updates. It does not file the final declaration, which goes through other MTD software or your accountant.
• Company books: the statutory accounts report prepares FRS 105 (micro-entity) or FRS 102 Section 1A accounts from the ledger, tags them in iXBRL and validates them, and gives you the full accounts HMRC needs attached to the Corporation Tax return. IQ Books does not file the CT600, and electronic filing to Companies House switches on once our Companies House presenter account is approved; until then you download the accounts.
• VAT returns under Making Tax Digital for either structure.
• Payroll: IQ Books records wages and PAYE in the ledger but does not run payroll, so a director's salary goes through payroll software.

The free plan is one organisation with the whole double-entry ledger and no time limit; doing the bookkeeping by hand is free, and automation draws on 1,000 one-off free credits. If you incorporate, the company is a new set of books, and keeping the sole trader books open alongside it is a second organisation, which any paid plan adds for £2 a month. IQ Books is UK only. If you are still comparing tools, our guide to the best accounting software for sole traders sets out the options.