At What Profit Should You Set Up a Limited Company?

There is no single profit level at which a limited company becomes the right choice. On 2026-27 rates, a sole trader who withdraws every pound often keeps more than a company director at profits from £30,000 to £100,000. A company starts to win when you can leave profit in the business, make employer pension contributions, share dividends with a spouse or need limited liability.

Key takeaways

• If you withdraw all your profit, a sole trader can take home more than a limited company director at £30,000, £50,000, £70,000 and £100,000 of profit.
• A company wins when you only need part of the profit personally and can leave the rest in the business.
• Employer pension contributions and spouse shareholdings can swing the comparison further.
• Limited liability, credibility and IR35-related contracts are often better reasons to incorporate than tax.
• Run your own numbers before deciding, and plan the switch around your year end.

Why the old rule of thumb no longer works

For years, advisers suggested incorporating once profit reached around £30,000 to £40,000. That rule came from a time when dividend tax rates were lower and employer National Insurance was less costly. In 2026-27 the dividend rates are 10.75%, 35.75% and 39.35%, employer NI is 15% above £5,000, and Corporation Tax runs from 19% to 25%. The combined effect is that the tax advantage of a company has narrowed considerably if you take everything out.

That does not mean incorporation is a bad idea. It means the question has changed from “when does the tax saving start?” to “what will I actually do with the profit, and what else do I need from the business structure?”

The numbers if you withdraw everything

We modelled a single director in England, with a £12,570 salary and all remaining profit paid out as dividends, against a sole trader paying Income Tax and Class 4 National Insurance. These are the take-home results.

Profit	Limited company	Sole trader	Sole trader ahead by
£30,000	£24,403	£25,468	£1,065
£50,000	£38,862	£40,268	£1,406
£70,000	£51,043	£51,911	£869
£100,000	£65,210	£69,311	£4,102

You can see the detail behind each line in our posts on £30,000, £50,000, £70,000 and £100,000 profit. The assumptions are the same in each: no other income, no student loan, England rates and every pound of post-tax profit paid out.

When a limited company starts to win: retaining profit

The sole trader comparison assumes you spend everything you earn. If you do not, the picture changes. Profit left in a company has only borne Corporation Tax, at 19% up to £50,000 of profit. A sole trader pays Income Tax and National Insurance on every pound of profit in the year it is earned, whether or not they spend it.

Take a business with £100,000 of profit where the director only needs about £51,000 to live on. The director takes a £12,570 salary and £45,000 of dividends, paying roughly £6,600 of dividend tax, and about £22,000 stays in the company after Corporation Tax. A sole trader would pay tax on the whole £100,000 and would have about £18,000 left over after personal spending. If the company money is later extracted at the 10.75% rate in a lower-income year, it can still leave you ahead, and in some cases it can be taken out through a liquidation at capital gains rates. These figures are illustrative and depend heavily on future tax rules, so get advice before relying on them.

Pensions, spouses and other levers

Several planning options are only available to, or work better for, a limited company.

• Employer pension contributions: deductible for Corporation Tax and free of National Insurance. See our guide to employer pension contributions.
• Spouse shareholdings: where a spouse genuinely owns shares, dividends can use a second personal allowance and basic rate band, subject to the settlements rules.
• Timing: you choose when to pay dividends, so you can spread them across tax years.
• Investment inside the company: some directors keep surplus profit in the business to fund growth or later purchases.

Non-tax reasons to incorporate

Many people set up a company at lower profits for reasons that have nothing to do with tax.

• Limited liability: a company is a separate legal person, so business debts are generally not yours personally unless you give guarantees.
• Client expectations: some larger customers will only contract with limited companies.
• Contractor status: a contractor working through a personal service company may prefer it to an umbrella company. Read our comparison of contractor limited company vs umbrella company.
• Brand and professionalism: a company name and registered status can help with credibility.
• Future sale or investment: a company is easier to sell or bring investors into than a sole trader business.

The extra costs and obligations of a company

A limited company brings additional duties. You must file statutory accounts and a confirmation statement at Companies House, file a Corporation Tax return, keep proper records and maintain a register of people with significant control. Costs include accountancy fees, a business bank account, possible payroll set-up and Companies House fees. Our guide to how much it costs to run a limited company sets these out, and our confirmation statement guide covers the annual filing.

You also have to be careful with money. You cannot treat company cash as your own. Withdrawals must be salary, dividends or loan repayments, or they end up in a director’s loan account that can attract tax. Our post on director’s loan accounts explains the risks.

A simple decision framework

Your situation	Likely direction
Profit under £30,000 and you need all of it	Sole trader is often simpler and cheaper, unless liability or client demands matter
Profit £30,000 to £60,000, you need most of it	Close call; incorporate for protection or contracts, not tax alone
Profit above £60,000 and you can leave money in the business	A company is often worth serious consideration
High earner with a spouse who can own shares or pension contributions to make	Company usually has more planning options
High-risk work or large contracts	Company for liability protection

How to switch if you decide to incorporate

Moving from sole trader to company needs planning. You will transfer assets, deal with tax on any goodwill, close or adjust your VAT registration and tell HMRC. Our guide on incorporating your sole trader business covers the steps, and our post on limited company formation costs and timeline shows what to expect.

If you are not sure, run the numbers on our take-home pay calculator and talk to an accountant. A short conversation costs far less than getting the structure wrong for several years.

The bottom line

There is no magic profit figure for incorporating. If you take out every pound, a sole trader can keep more tax-wise even at £100,000, but a company wins when you can retain profit, use pensions or need liability protection. Decide on your goals first, then check the numbers.

Frequently asked questions

At what profit should I incorporate?

There is no single figure. On 2026-27 rates a sole trader can keep more if every pound is withdrawn, so incorporate when you can retain profit, use pensions or need liability protection.

Is a limited company worth it at £30,000 profit?

Tax alone usually does not justify it, but limited liability, client requirements or contracting through a personal service company might.

Do limited companies pay less tax than sole traders?

Not always. They pay Corporation Tax plus dividend tax and employer NI, and only come out ahead if profit is retained or other reliefs are used.

Can I switch from sole trader to limited company later?

Yes, but you will need to transfer the business, tell HMRC and handle any tax on assets or goodwill, so plan ahead.

Should I use an accountant to decide?

Yes, because your other income, pension options and plans for the business all affect the answer.