Sole trader vs limited company tax comparisons must include business taxes, personal taxes and National Insurance. Sole traders pay tax on business profits. Companies pay Corporation Tax, while owners may pay tax on salary and dividends. A company does not automatically leave you better off.
For 2026/27, dividend tax rates are 10.75%, 35.75% and 39.35%, depending on the income band. Comparing a company’s 19% Corporation Tax rate with a sole trader’s 40% Income Tax rate leaves out the tax paid when company profits reach the shareholder. www.gov.uk
This Accfirm guide compares the full tax cost, shows take-home income at four profit levels and explains what changes when you retain money for business growth.
What are the main tax differences between a sole trader and a limited company?
The main difference is who earns the profit and how money reaches the owner. A sole trader earns business profits personally. A limited company earns its own profits and must account separately for payments to its directors and shareholders.
| Tax question | Sole trader | Limited company |
|---|---|---|
| Who pays tax on business profit? | The individual pays Income Tax and applicable Class 4 National Insurance | The company pays Corporation Tax |
| How does the owner take money? | Personal drawings | Salary, dividends or another correctly recorded payment |
| Does a withdrawal itself reduce taxable profit? | No: personal drawings are not an expense | A qualifying salary can be deductible; dividends are not |
| What happens to profits kept in the business? | Tax is still calculated on taxable profit | Corporation Tax applies; personal dividend tax generally arises when dividends are paid |
The company and its owner are separate for these purposes. Compare their combined taxes rather than looking only at the company’s bill. www.gov.uk
How does sole trader tax work in 2026/27?
A sole trader normally pays Income Tax and Class 4 National Insurance on taxable business profit. You start with business income, deduct allowable costs and make the relevant tax adjustments. The amount you draw for living costs does not determine the taxable profit.
For example, withdrawing £20,000 from a trade with £50,000 taxable profit does not reduce the profit to £30,000. Your own wages and drawings are not deductible business expenses.
What Income Tax rates apply?
For England, Wales and Northern Ireland, the standard Personal Allowance is £12,570. The following bands apply to taxable non-dividend income after deducting the available allowance, before any adjustments that extend the bands:
| Taxable income after allowances | Income Tax rate |
|---|---|
| First £37,700 | 20% |
| Above £37,700 up to £125,140 | 40% |
| Above £125,140 | 45% |
The standard allowance means someone with no other income normally enters the 40% band when total income exceeds £50,270. Scotland has different rates for trading profits and salary. GOV.UK
Your Personal Allowance reduces by £1 for every £2 of adjusted net income above £100,000. It is zero at £125,140. A comparison above £100,000 must include this reduction.
What National Insurance does a sole trader pay?
For 2026/27, Class 4 National Insurance is:
- 6% on profits above £12,570 up to £50,270.
- 2% on profits above £50,270.
At profits of £7,105 or more, Class 2 contributions are treated as paid to protect your National Insurance record. There is no compulsory Class 2 cash payment in the examples below. Below £7,105, voluntary Class 2 contributions may be relevant; the current rate is £3.65 a week.
How does limited company tax work in 2026/27?
A company tax comparison has three parts: salary and payroll taxes, Corporation Tax, and personal tax on dividends. The salary affects company profit. Corporation Tax reduces the profit available for dividends. Dividend tax then affects the shareholder’s take-home income.
1. Account for salary and National Insurance
A director’s salary is processed through PAYE. The usual employee National Insurance rates for category A are 8% above the primary threshold up to the upper earnings limit, then 2%. Employer National Insurance is normally 15% above the secondary threshold.
For a director holding office throughout the tax year, the relevant annual thresholds are £12,570 for employee National Insurance and £5,000 for standard employer National Insurance.
Under the examples’ assumptions, a £12,570 salary creates no personal Income Tax or employee National Insurance. However, the company pays:
Employer National Insurance = (£12,570 − £5,000) × 15% = £1,135.50.
The company cannot claim Employment Allowance where its sole director is the only employee liable for employer National Insurance. Having another person on the payroll does not automatically establish eligibility. www.gov.uk
2. Calculate Corporation Tax on company profit
The main Corporation Tax rules are:
| Company profit | Corporation Tax treatment |
|---|---|
| £50,000 or less | 19% small profits rate |
| Between £50,000 and £250,000 | 25% main rate, reduced by Marginal Relief where eligible |
| More than £250,000 | 25% main rate |
These limits assume the full thresholds apply. Short accounting periods and associated companies reduce the limits.
The relevant company profit is calculated after deductible remuneration and other tax adjustments, rather than simply copying the sole trader’s profit figure.
3. Calculate personal dividend tax
For 2026/27, the dividend allowance is £500. Taxable dividends above the available allowances are charged at:
| Income band | Dividend tax rate |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
Your dividend income is added to your other income to establish the bands. The £500 dividend allowance uses part of the band; it does not create an extra £500 basic-rate band. www.gov.uk
Genuine dividends do not attract National Insurance. That does not remove the Corporation Tax already paid on the underlying profit.
Does 19% Corporation Tax mean a 19% total tax bill?
No. Suppose £100 of company profit is taxed at 19%, then the remaining amount is paid as a dividend entirely within the shareholder’s basic-rate band. Assume the relevant personal allowances are already used:
| Calculation | Amount |
|---|---|
| Company profit | £100.00 |
| Corporation Tax at 19% | £19.00 |
| Dividend available | £81.00 |
| Dividend tax at 10.75% | £8.71 |
| Cash reaching the shareholder | £72.29 |
The combined tax is approximately 27.71%, before any separate payroll costs. Apply the dividend rate to the post-Corporation Tax amount, rather than simply adding the two percentages.
Which structure leaves more take-home income in 2026/27?
Under the full-withdrawal assumptions below, the sole trader keeps more personal income at all four illustrated profit levels. Retained profits, pensions, other income and different company circumstances can change the result.
The comparison assumes:
- An owner living in England, Wales or Northern Ireland, below State Pension age, with no other income and the standard Personal Allowance. The director uses standard National Insurance category A.
- Equal business profit before owner remuneration, with the same ordinary operating costs.
- A company with one shareholder-director, who is its only employee and holds office throughout the tax year.
- A £12,570 director’s salary, no Employment Allowance, and all remaining distributable profit paid as dividends.
- A 12-month company accounting period, no associated companies or exempt distributions, and no other Corporation Tax adjustments.
- No pension contributions, student loans, benefits in kind or additional company compliance and formation costs.
The salary is a modelling assumption, rather than a universal recommendation. Amounts below are rounded to the nearest pound; the calculations use pence before display rounding.
| Business profit before owner pay | Sole trader tax and NI | Company and owner tax and NI | Sole trader take-home | Company owner take-home |
|---|---|---|---|---|
| £30,000 | £4,532 | £5,597 | £25,468 | £24,403 |
| £50,000 | £9,732 | £11,138 | £40,268 | £38,862 |
| £80,000 | £22,289 | £24,235 | £57,711 | £55,765 |
| £100,000 | £30,689 | £34,790 | £69,311 | £65,210 |
The company column includes employer National Insurance, Corporation Tax and personal dividend tax. Personal tax and employee National Insurance on the modelled salary are nil.
Additional company running costs would also need including in a practical comparison. These figures do not establish a universal incorporation threshold.
How is the £80,000 company example calculated?
The calculation starts with £80,000 profit before director remuneration:
| Calculation | Amount |
|---|---|
| Profit before director salary and employer NI | £80,000.00 |
| Less director salary | £12,570.00 |
| Less employer National Insurance | £1,135.50 |
| Company taxable profit | £66,294.50 |
| Corporation Tax after Marginal Relief | £13,818.04 |
| Profit available as dividends | £52,476.46 |
Corporation Tax uses Marginal Relief because taxable profit is between the relevant limits. It is not calculated at a flat 19%. www.gov.uk
The £12,570 salary uses the Personal Allowance. Of the dividends:
- £500 is covered by the dividend allowance.
- £37,200 is taxed at 10.75%: £3,999.00.
- £14,776.46 is taxed at 35.75%: £5,282.58.
Total dividend tax is £9,281.58. The shareholder receives £55,764.88 after personal tax: £12,570 salary plus £52,476.46 dividends, less £9,281.58 dividend tax.
The comparable sole trader receives £57,711.40 after Income Tax and Class 4 National Insurance. The difference is £1,946.52 before additional company costs.
What changes if you retain profits for business growth?
A company may leave more money available for business use when the owner does not withdraw all profits. Corporation Tax still applies, but personal dividend tax on undistributed profits is deferred until a taxable distribution is made.
To compare retention fairly, hold the owner’s personal take-home income constant.
Using the same £100,000 profit assumptions, the company pays its owner a £12,570 salary and £25,000 dividends. Dividend tax is £2,633.75, leaving personal take-home income of £34,936.25.
Now compare both structures while keeping that same personal income:
| Where the money goes | Sole trader | Limited company |
|---|---|---|
| Business profit before owner remuneration | £100,000.00 | £100,000.00 |
| Current tax and NI under the model | £30,688.60 | £22,887.29 |
| Personal take-home income | £34,936.25 | £34,936.25 |
| Money remaining for business use | £34,375.15 | £42,176.46 |
The company retains £7,801.31 more for business use at this stage, before additional running costs. Its current tax figure includes £1,135.50 employer NI, £19,118.04 Corporation Tax and £2,633.75 dividend tax.
However, the retained company funds belong to the company. A later dividend can create further personal tax. The example demonstrates a difference in current funds available for reinvestment, rather than a guaranteed lifetime tax saving. www.gov.uk
Which factors can change your tax comparison?
Other income, tax residence, pension funding, payroll circumstances and business costs can change the result. A comparison should reflect your actual position, including how much money must reach your household each year.
How do other income and Scottish tax residence affect the figures?
Employment, rental and investment income can use your Personal Allowance and tax bands before you take business income. A £12,570 company salary is not necessarily free of personal Income Tax if the allowance is already used elsewhere.
Scottish rates apply to trading profits and salary, while dividend taxation follows the same rules as the rest of the UK. Scottish taxpayers need a separate calculation.
Can pension contributions change the comparison?
Yes, but pension funding should be compared separately from spendable take-home income.
A sole trader’s personal pension contributions may qualify for Income Tax relief. They are not ordinary deductions from trading profit.
A company’s employer contribution to a registered pension scheme may reduce taxable company profit where it meets the applicable business-purpose rules. HMRC requires the contribution to be paid for the relevant deduction.
The standard pension annual allowance is £60,000, but it can be lower in some circumstances. Review the available allowance before making contributions. Money allocated to a pension is not the same as money available for current household spending.
How should company running costs be included?
Compare quotes for bookkeeping, statutory accounts, the CT600 Company Tax Return, payroll and personal Self Assessment. Use the additional cost of company administration rather than assuming all accounting costs arise only under one structure.
Current standard online incorporation costs £100. The online confirmation statement fee is £50 with the first statement in each 12-month payment period.
Accfirm’s limited company accountants can help you identify the reporting work and costs relevant to your comparison.
When do sole traders and limited companies pay tax?
Tax liability and payment timing are separate questions. A large January Self Assessment payment can include an advance towards the following year. It does not necessarily mean the current year’s tax rate is higher.
| Tax obligation | Usual timing |
|---|---|
| Personal online Self Assessment return and balancing payment | 31 January following the end of the tax year |
| Personal payments on account, where required | 31 January and 31 July |
| Corporation Tax payment for a typical small company | Nine months and one day after the tax accounting period ends |
| Company Tax Return | 12 months after the tax accounting period ends |
Under the usual timetable, the online return and balancing payment for 2026/27 are due on 31 January 2028. A company’s deadlines follow its accounting period.
Can payments on account make the first bill look larger?
Yes. Suppose the £50,000 sole trader example is the owner’s first Self Assessment year, with no tax collected elsewhere and no previous payments on account.
The model’s 2026/27 Income Tax and Class 4 liability is £9,731.80. Under the normal payment rules, the amount due on 31 January 2028 would include:
- £9,731.80 for 2026/27.
- £4,865.90 as the first payment on account for 2027/28.
- £14,597.70 in total.
The second £4,865.90 payment on account would normally fall due on 31 July 2028. The advance payments are credited towards the following year’s bill. They are not an extra tax charge.
Payments on account have exceptions, including where the previous year’s relevant tax was below £1,000 or more than 80% was paid outside Self Assessment. A company owner receiving dividends may also need personal Self Assessment and payments on account.
Frequently asked questions
Which tax rates apply to a return filed during 2026?
Use the rates for the tax year being reported. A 2025/26 return does not use the 2026/27 dividend rates. For 2025/26, the basic and higher dividend rates were 8.75% and 33.75%; the additional rate was 39.35%. GOV.UK
Does VAT registration make a limited company more tax efficient?
VAT registration is a separate calculation. Sole traders and companies can both need to register when VAT-taxable turnover exceeds £90,000 over the previous 12 months, or is expected to exceed £90,000 in the next 30 days alone. www.gov.uk
See Accfirm’s sole trader VAT registration guide for the registration rules.
Does Making Tax Digital change the tax rates?
MTD for Income Tax changes reporting requirements, rather than adding a separate profit-tax rate. The first phase began on 6 April 2026 for qualifying sole trader and property income above £50,000 in 2024/25, subject to exemptions. Company Corporation Tax reporting is separate.
Qualifying income is gross self-employment and property income before expenses. The profit figures in the tax comparison are not the MTD eligibility measure.
Can an owner withdraw company money without paying salary or dividends?
Other payments can be appropriate, but every withdrawal needs correct treatment. Expense reimbursements and loan repayments have different rules from salary and dividends. Unexplained withdrawals may create a director’s loan. Dividends require sufficient available profits and supporting records. www.gov.uk
Does this comparison cover income caught by IR35?
No. The worked examples use ordinary salary and dividend extraction. Contractors operating through a company should assess the off-payroll working rules for each engagement. Where the rules apply, employment-style taxation can change the result. www.gov.uk
How can Accfirm help you compare the two structures?
Start with a comparison based on your profit, other income and personal cash requirements. Include retained funds, pension plans and the extra cost of company compliance.
Accfirm’s sole trader accountants can help you review your current tax position. Speak to Accfirm about comparing sole trader and limited company tax using your actual figures.