Limited Company vs Sole Trader: Which Is Better in 2026/27?

Key takeaways

• A sole trader and the business are the same legal person. A limited company is a separate legal entity.
• Sole traders pay Income Tax and National Insurance on all profit. Companies pay Corporation Tax on profit, and the director pays tax on what they draw out.
• A company has more filing duties and usually higher accountancy costs.
• Limited liability protects personal assets in most cases, but does not protect against personal guarantees or wrongdoing.
• You can switch later, so the decision is not permanent.

What is the legal difference?

A sole trader runs a business in their own name. There is no legal separation between you and the business, so you are personally responsible for debts and contracts. A limited company is a separate legal entity owned by shareholders and managed by directors. The company can own assets, sign contracts and owe debts in its own name, and shareholders’ liability is normally limited to any unpaid amount on their shares.

How the tax compares

Sole trader tax

A sole trader pays Income Tax on business profit after expenses, using the same bands as employees. For 2026/27 the personal allowance is £12,570 and the basic rate band runs to £50,270. Sole traders also pay Class 4 National Insurance on profits above the lower profits limit. They file a Self Assessment return each year and make payments on account in January and July.

Limited company tax

A limited company pays Corporation Tax on its profit: 19% up to £50,000 and 25% above £250,000, with marginal relief between. The director can then take money as salary and dividends. Salary is deductible for the company, and dividends are paid from post-tax profit. Dividend tax is paid personally above the £500 allowance. For many people with profits above the personal allowance, this combination results in a lower overall tax bill than sole trader tax, especially if some profit stays in the company. Try both with our take-home pay calculator and salary vs dividend calculator.

A simple worked comparison: £70,000 profit

These figures are simplified to show the principle. They ignore pensions, other income and student loans.

• Sole trader: profit £70,000. Income Tax and Class 4 NI together would take a large share because part of the income falls into the 40% band.
• Limited company: profit before director pay £70,000. After a £12,570 salary, employer NI and Corporation Tax, the director can draw the remainder as dividends, taxed at 10.75% in the basic rate band and 35.75% above it.

The company route usually leaves more money after tax, but only if the profit is genuinely extracted as dividends and the company’s extra costs are accounted for. If you need all of the profit to live on, the saving is smaller than if you can leave some in the business.

Admin, filing and cost

A sole trader files one Self Assessment tax return a year. A limited company must do much more: statutory accounts for Companies House, a Corporation Tax return, a confirmation statement, payroll if you pay yourself a salary, and ongoing statutory records such as registers and dividend paperwork. Directors also file their own Self Assessment returns if they receive dividends above the allowance or other untaxed income. Accountancy fees for a small company are therefore normally higher, which is why the tax saving needs to outweigh the cost.

Liability and credibility

Limited liability can protect your home and savings if the business fails, provided the company is run properly. It does not protect you if you give a personal guarantee, trade while insolvent or act unlawfully. Many corporate clients prefer to deal with limited companies, and some will only contract with them. Contractors also need a company to operate outside IR35 in many cases. See our IR35 guide.

Taking money out

A sole trader can draw money freely. A company director must follow rules. Salary goes through payroll. Dividends must come from distributable profit and be documented with a board minute and a dividend voucher. Money taken out that is neither salary nor a valid dividend goes on a director’s loan account and may trigger a tax charge if it is not repaid. Read our director’s loan account guide and paying dividends correctly.

Who should stay a sole trader?

• You earn less than about £30,000 a year in profit.
• You want the simplest possible admin.
• You trade casually or are testing an idea.
• You have little personal risk and no need for a corporate customer-facing structure.

Who should consider a limited company?

• Your profit is rising above the point where personal tax rates are steep.
• You want to leave profit in the business to invest or save.
• You want limited liability or to bring in partners or investors.
• Your clients expect a company or you operate as a contractor.

Three real-world scenarios

The freelance designer earning £25,000

Profit is close to the personal allowance and National Insurance thresholds. A sole trader set-up keeps admin and cost low, and the tax saving from a company would be small. Staying a sole trader is usually sensible until income grows.

The IT contractor earning £90,000

Here a limited company is usually the better route. Clients often require it, the contractor can structure pay between salary and dividends, and can claim business expenses and pension contributions through the company. Status checks under IR35 still apply, so get advice on each contract.

The online seller who wants to reinvest

If most profit goes back into stock and marketing, a company can be attractive because retained profit is taxed at Corporation Tax rates rather than personal rates. The seller only pays dividend tax on money they actually take out. Limited liability also helps when you hold stock and trade with suppliers.

Questions to ask before you decide

• How much of my profit do I actually need to live on each year?
• Do my clients, lenders or suppliers expect a limited company?
• Am I comfortable with the extra record keeping and statutory duties?
• Will I want to hire staff, sell the business or bring in investors?
• Have I compared the net position with realistic costs, not just headline tax rates?

Can I switch later?

Yes. A sole trader can incorporate at any time, and a company can be wound up or closed if it stops making sense. When you incorporate, you need to think about transferring assets, stock and contracts, informing HMRC, and cancelling Self Assessment trading income from the date the business changes hands. Our company formation team can handle the process.

The bottom line

A limited company usually starts to pay off once profits comfortably exceed what you need to live on, thanks to lower tax and limited liability, but it brings more admin. Sole trader status stays simpler at lower profits, so run both sets of numbers before you decide.

Frequently asked questions

Is it cheaper to be a sole trader or a limited company?

Being a sole trader costs less to run, but a limited company can save tax when profits are high enough. Compare your own figures including accountancy costs.

At what profit should I become a limited company?

Many people find the switch pays off at consistent profits of about £30,000 to £50,000 or more, but it depends on how much you need to take out.

Do limited companies pay less tax?

Often, yes, because of Corporation Tax and the ability to use dividends, but a company also has extra costs and rules.

Can a sole trader become a limited company?

Yes. You register a new company and transfer the business to it, and notify HMRC.

Does a limited company protect my personal assets?

Usually, but not if you give personal guarantees or act wrongfully.