Sole trader vs limited company: which pays less UK tax in 2026/27?
A worked-out comparison at £30,000, £50,000 and £80,000 of profit, with the April 2026 dividend rate rise fully factored in.
Why this article exists
Most articles on this question were written between 2018 and 2023 and have not been updated since. They were correct at the time: a freelancer earning £50,000 of profit could keep £1,500 more a year by incorporating, drawing a small salary and paying the rest as dividends.
Two consecutive Budgets changed that. In April 2025 the Treasury raised employer National Insurance from 13.8% to 15% and dropped the threshold from £9,100 to £5,000, adding around £1,100 of cost to the standard "low salary, big dividends" structure. In April 2026 the basic and higher rate dividend tax bands each rose by 2 percentage points (the additional rate stayed at 39.35%), taking another £250 to £1,000 out of a director's pocket depending on profit. Add the two Budgets together and the headline numbers below come out the way they do.
Headline comparison at three profit levels
| Profit before tax | Sole trader (2026/27) | Ltd company (2025/26) | Ltd company (2026/27) |
|---|---|---|---|
| £30,000 profit | £25,468 | £24,657 | £24,403 |
| £50,000 profit | £40,268 | £39,440 | £38,862 |
| £80,000 profit | £57,711 | £56,929 | £55,890 |
Net to the individual after all tax and NI, assuming the ltd director extracts every pound of after-tax profit as salary plus dividends.
How a sole trader is taxed in 2026/27
A sole trader is taxed on profit (income minus allowable expenses), not turnover. Profit flows through to your personal tax return and is taxed once.
- Income tax at the standard UK bands: 0% on the first £12,570, then 20% to £50,270, then 40% to £125,140, then 45% above that. Personal allowance tapers by £1 for every £2 of profit over £100,000.
- Class 4 National Insurance at 6% on profit between £12,570 and £50,270, then 2% on profit above £50,270.
- Class 2 NI is not payable for profits above the Small Profits Threshold since the 2024 reform, so it is now ignored in this article. See our Class 2 and Class 4 NI explainer for the full picture.
Everything is paid annually through Self Assessment: the tax for 2026/27 is due on 31 January 2028, with payments on account in January and July of each preceding year. The structure is simple and there is no separation between business and personal money.
How a limited company is taxed in 2026/27
A limited company is taxed twice: once at the corporate level on its profit, then again at the personal level when the director extracts money. The personal rate is lower than income tax, but the company has paid Corporation Tax already.
At the corporate level:
- Corporation Tax at 19% if the company's taxable profit (after director salary and employer NI) is £50,000 or less. The main rate of 25% applies above £250,000 of profit, with marginal relief in between (effective rate around 26.5% on the slice between thresholds).
- Employer NI at 15% on any director salary above £5,000.
- Director salary is a deductible business expense, so paying it reduces the Corporation Tax bill. Most owner-directors take a salary equal to the Personal Allowance (£12,570) to use it up without triggering income tax.
At the personal level:
- Income tax on salary uses the standard bands. A £12,570 salary plus the Personal Allowance is exactly the right size to pay zero income tax.
- Dividend tax on amounts taken out as dividends. The first £500 is covered by the dividend allowance. Above that, 2026/27 rates are 10.75% in the basic rate band and 35.75% in the higher rate band, both up 2 percentage points from April 2026. The additional rate stayed unchanged at 39.35%.
Verify before relying on big decisions. The post-April-2026 dividend rates above are the figures used throughout this article. Cross-check the live HMRC published rates page before using these numbers to decide whether to incorporate.
Worked examples
Each example assumes the director extracts every pound of after-tax profit. The "Sole trader" column uses the salary-pages calculator engine; the "Ltd" columns are computed from the assumptions above and verified separately.
£30,000 of profit
Sole trader leads by £1,065 in 2026/27 when the director draws every available pound.
| Sole trader | Ltd company (2026/27) | |
|---|---|---|
| Profit before personal tax | £30,000 | £30,000 |
| Director salary | n/a | £12,570 |
| Employer NI | n/a | £1,136 |
| Corporation Tax | n/a | £3,096 |
| Income tax (or dividend tax) | £4,532* | £1,365 |
| Class 4 NI (sole trader only) | £1,046 | n/a |
| Net to individual | £25,468 | £24,403 |
* Sole trader income-tax-and-NI total is shown split across the last two rows; the ltd row collapses dividend tax into one line for comparability.
Sole trader keeps £1,065 more a year than the ltd director extracting all profit. The April 2026 dividend rate rise cost the ltd director an extra £254 versus the same setup in 2025/26.
How the ltd dividend was sized
Profit £30,000 less salary £12,570 less employer NI £1,136 = £16,295 of taxable corporate profit. After Corporation Tax of £3,096, £13,199 is left as a dividend. The director pays £1,365 of personal dividend tax on it (post-April-2026 rates), netting £11,833. Add the £12,570 salary back and the director's net is £24,403.
Under the 2025/26 dividend rates the same setup paid £1,111 of dividend tax and netted £24,657, so the April 2026 rise cost this director £254.
£50,000 of profit
Sole trader leads by £1,406 in 2026/27 when the director draws every available pound.
| Sole trader | Ltd company (2026/27) | |
|---|---|---|
| Profit before personal tax | £50,000 | £50,000 |
| Director salary | n/a | £12,570 |
| Employer NI | n/a | £1,136 |
| Corporation Tax | n/a | £6,896 |
| Income tax (or dividend tax) | £9,732* | £3,107 |
| Class 4 NI (sole trader only) | £2,246 | n/a |
| Net to individual | £40,268 | £38,862 |
* Sole trader income-tax-and-NI total is shown split across the last two rows; the ltd row collapses dividend tax into one line for comparability.
This is the profit level where most online calculators still say "incorporate now". After two consecutive Budgets that loaded costs onto the corporate route (employer NI in April 2025, dividend rates in April 2026), the sole trader keeps £1,406 more. The April 2026 rise alone added £578 to the ltd director's tax bill.
How the ltd dividend was sized
Profit £50,000 less salary £12,570 less employer NI £1,136 = £36,295 of taxable corporate profit. After Corporation Tax of £6,896, £29,399 is left as a dividend. The director pays £3,107 of personal dividend tax on it (post-April-2026 rates), netting £26,292. Add the £12,570 salary back and the director's net is £38,862.
Under the 2025/26 dividend rates the same setup paid £2,529 of dividend tax and netted £39,440, so the April 2026 rise cost this director £578.
£80,000 of profit
Sole trader leads by £1,822 in 2026/27 when the director draws every available pound.
| Sole trader | Ltd company (2026/27) | |
|---|---|---|
| Profit before personal tax | £80,000 | £80,000 |
| Director salary | n/a | £12,570 |
| Employer NI | n/a | £1,136 |
| Corporation Tax | n/a | £13,818 |
| Income tax (or dividend tax) | £22,289* | £9,157 |
| Class 4 NI (sole trader only) | £2,857 | n/a |
| Net to individual | £57,711 | £55,890 |
* Sole trader income-tax-and-NI total is shown split across the last two rows; the ltd row collapses dividend tax into one line for comparability.
At £80,000 the company hits the marginal-relief band of Corporation Tax (effective rate around 20.8%) and the director pays higher-rate dividend tax on a slice. The sole trader keeps £1,822 more a year. The dividend rise alone took £1,040 out of this director's pocket compared with 2025/26.
How the ltd dividend was sized
Profit £80,000 less salary £12,570 less employer NI £1,136 = £66,295 of taxable corporate profit. After Corporation Tax of £13,818, £52,476 is left as a dividend. The director pays £9,157 of personal dividend tax on it (post-April-2026 rates), netting £43,320. Add the £12,570 salary back and the director's net is £55,890.
Under the 2025/26 dividend rates the same setup paid £8,117 of dividend tax and netted £56,929, so the April 2026 rise cost this director £1,040.
What changed in April 2026
The April 2026 Budget raised the basic and higher rate dividend tax bands by 2 percentage points each, leaving the additional rate band unchanged. The dividend allowance also stayed at £500. The full picture:
| Band | 2025/26 | 2026/27 |
|---|---|---|
| Basic rate band | 8.75% | 10.75% |
| Higher rate band | 33.75% | 35.75% |
| Additional rate band | 39.35% | 39.35% (unchanged) |
The rise compounds with the previous year's employer NI hike, where the secondary threshold dropped from £9,100 to £5,000 and the rate moved from 13.8% to 15%. A director paying themselves a £12,570 salary now pays £1,135.50 of employer NI before any other tax bites, where the equivalent figure two years earlier was £478.40.
For directors planning their compensation, the practical effect is that the gap between sole trader and limited company on extraction-heavy scenarios has widened from "barely any" to "clearly favours sole trader". The math at £50,000 of profit moved from sole trader winning by £828 in 2025/26 to winning by £1,406 in 2026/27.
When a limited company still wins
The worked examples above all assume full extraction. Plenty of real-world scenarios push the answer the other way:
- Retained profit. If you only need £40,000 of personal income but the business made £80,000, parking the extra £40,000 inside the company means it suffers only Corporation Tax (19% in the small profits band), not the dividend tax on top. You pay personal tax later when you eventually extract it, ideally in a year of lower income.
- Multiple shareholders. A married couple where both spouses hold shares can split dividends across two sets of personal allowances and basic rate bands, which is impossible for a sole trader.
- Pension contributions. Company-funded pension contributions are deductible against Corporation Tax and are not capped by salary the way personal contributions are, which makes incorporation attractive for high earners trying to fund retirement quickly.
- Limited liability. Sole traders are personally liable for business debts and lawsuits. Limited companies ring-fence the owner's personal assets. For trades with material risk (consultancy involving big-budget projects, anything involving safety, anything client-facing) this is a non-tax reason that often outweighs a four-figure annual saving.
- Client perception and preference. Some clients (especially in financial services and large corporates) only contract with limited companies. If your prospective customer base requires it, the question is moot.
Costs the headline numbers ignore
The tables above isolate the tax impact. A complete comparison should also factor in:
- Annual accountancy fees. Most owner-managed limited companies pay an accountant £600 to £1,500 a year to file company accounts, the corporation tax return, the director's personal Self Assessment, and run payroll for the salary. A sole trader typically pays £200 to £500 for the same work.
- Companies House filings. A confirmation statement (£34) is due annually; statutory accounts must be filed within 9 months of the year-end. Late filing penalties start at £150 and escalate.
- IR35 and off-payroll rules. If you contract via your own limited company and HMRC deems the engagement "inside IR35", the tax advantages are wiped out and you may end up paying more than a sole trader would. This applies almost exclusively to contractors with a single client, but it is a meaningful risk in some industries.
Frequently asked questions
Is sole trader or limited company better for tax in 2026/27?
For a freelancer or contractor who extracts every pound of profit each year, sole trader is now cheaper at £30,000, £50,000 and £80,000 of profit. Limited companies still win when profit is retained inside the company, split between shareholders, or used to fund a large pension.
How much did the April 2026 dividend tax rise cost?
A director taking £30,000 of profit paid about £254 more in 2026/27 than 2025/26 for the same setup. At £50,000 it was £578. At £80,000 it was £1,040. The rise was 2 percentage points in the basic and higher rate bands; the additional rate band stayed at 39.35%.
Can I switch from sole trader to limited company mid-year?
Yes. You file a Self Assessment return for the portion of the tax year you traded as a sole trader, incorporate the company, and run it from the changeover date onwards. Most accountants charge a one-off fee to transfer clients, contracts and any goodwill into the new entity.
Does VAT registration change the answer?
No. VAT is charged on sales above the £90,000 threshold regardless of business structure, both routes register the same way, and the VAT scheme choice (standard or flat rate) is independent of structure.
What about high earners over £100,000?
Above £100,000 the personal allowance tapers. For a sole trader this creates an effective 60% marginal rate on the £100,000 to £125,140 band. A limited company can dodge this by leaving profit inside the company until a lower-income year, which is one of the strongest cases for incorporating at high profit levels.
Sources
Related guides
- Class 2 and Class 4 National Insurance for the full self-employed NI picture.
- Allowable expenses that reduce sole trader profit before any of the tax above bites.
- Payments on account for the January and July cycle that catches first-time Self Assessment filers off guard.
- Legitimate ways to reduce your tax bill, applicable under either structure.
Or run the numbers for your own profit level: £50,000 self-employed, £80,000 self-employed, or browse the full self-employed bracket set.