Guide · Business
Sole Trader vs Limited Company: Which Pays Less Tax?
Corporation tax, dividends, salary, and National Insurance — the full comparison at different profit levels for 2026/27.
How sole trader tax works
As a sole trader, your business profit is your personal income. You pay:
- Income tax at 20% (basic rate), 40% (higher rate), or 45% (additional rate) on profits above the personal allowance (£12,570).
- Class 4 NI at 6% on profits from £12,570 to £50,270, and 2% above that.
- Class 2 NI of £3.45/week if profits exceed the small profits threshold (£12,570).
On £50,000 profit, a sole trader pays roughly £13,500 in tax and NI, keeping £36,500.
How limited company tax works
A limited company pays corporation tax on profit (19% on profits up to £50,000; 25% above £250,000; marginal relief in between). As a director and shareholder, you then extract money as a combination of salary (deductible from corporation tax) and dividends (taxed at lower rates than income tax, with no NI).
The optimal 2026/27 structure for a single director with no other income is:
Optimal director extraction 2026/27
- Salary: £12,570 (uses personal allowance, no income tax)
- Remaining profit: left in company, taxed at 19% corporation tax
- Dividends: drawn from post-tax profit, first £500 tax-free
- Dividend tax: 8.75% (basic rate) above the £500 allowance
Side-by-side comparison: £50,000 and £80,000 profit
| Sole trader £50k | Ltd company £50k | Sole trader £80k | Ltd company £80k | |
|---|---|---|---|---|
| Corporation tax | — | £7,122 | — | £14,862 |
| Income tax | £7,486 | £0 | £19,486 | £3,486 |
| National Insurance | £3,326 | £0 | £4,526 | £0 |
| Dividend tax | — | £2,607 | — | £3,857 |
| Total tax | £10,812 | £9,729 | £24,012 | £18,205 |
| Take-home | £39,188 | £40,271 | £55,988 | £61,795 |
Ltd company figures assume £12,570 salary + dividends from remaining post-CT profit. Approximate — actual figures depend on expenses and allowances.
At £50,000, the saving barely covers a good accountant. At £80,000, it is significant after fees.
Other factors beyond tax
Tax is not the only consideration. A limited company also provides limited liability — your personal assets are protected if the business is sued or becomes insolvent. It can look more professional to some clients. But it comes with more administration: Companies House filings, corporation tax returns, payroll, and the cost of a separate business bank account.
For most freelancers and contractors earning under £35,000 profit, the simplicity of sole trader status outweighs the modest tax saving. Above £50,000, the calculation shifts materially.
Frequently asked questions
At what profit level does a limited company become tax-efficient?
As a rough guide, a limited company begins to offer meaningful tax savings once annual profit exceeds around £30,000–£35,000. Below that level, the saving is often outweighed by accountancy fees (typically £1,000–£2,000/year for Ltd companies vs £300–£600 for sole traders). Above £50,000, the gap becomes very significant.
What is the most tax-efficient salary for a Ltd company director?
For 2026/27, the optimal single-director salary is typically £12,570 (the personal allowance threshold) or £9,100 (the Secondary NI threshold if the company has no Employment Allowance). Both avoid employee and employer NI on the salary, and the company gets corporation tax relief on it.
Do I need an accountant to run a limited company?
Technically no, but practically yes for most people. Ltd companies must file annual accounts with Companies House, a corporation tax return, a confirmation statement, and directors must file self-assessment returns. Errors attract penalties. Most Ltd company owners spend £1,000–£2,000/year on accountancy, which should be factored into your break-even calculation.
How does IR35 affect limited company contractors?
IR35 (off-payroll working rules) tests whether your engagement with a client looks like employment. If caught inside IR35, your limited company income is treated as employment income and taxed accordingly — eliminating most of the tax advantage. Since 2021, the responsibility for determining IR35 status has sat with medium and large clients, not the contractor.