Limited Company vs Sole Trader: Tax Differences (Plain English Guide)

A limited company is not automatically more tax-efficient than being a sole trader. Compare the tax on business profit with the tax on taking money out, together with the extra administration. The answer depends on your circumstances and the tax year.

How the two structures are taxed

A sole trader pays personal Income Tax and normally Class 4 National Insurance on business profits, whether the money is withdrawn or left in the business. Class 2 is no longer a compulsory weekly payment for a trader whose profits qualify for treated-as-paid contributions. Voluntary Class 2 can be relevant at lower profits.

A limited company pays Corporation Tax on its taxable profits. Salary can reduce company profits but can attract PAYE and employee and employer National Insurance. Dividends are paid from available distributable profits after company tax and can attract personal dividend tax. Retaining profits defers extraction, not the company's Corporation Tax.

For 2026/27, the standard personal allowance is £12,570 and the dividend allowance is £500. The ordinary dividend rates are 10.75%, 35.75% and 39.35%. Scottish non-dividend Income Tax bands differ. Other income and allowance tapering can change the comparison.

A £12,570 salary is not automatically free of employer National Insurance. In 2026/27 the ordinary employer threshold is £5,000 and the rate above it is 15%. Employment Allowance eligibility matters. A company with only one director who is its only employee liable for employer National Insurance cannot claim it.

One illustration for 2026/27: £30,000 profit

This deliberately simple example is not an optimal salary recommendation. Assume a UK-resident owner under State Pension age in England, Wales or Northern Ireland, with no other income, student loan, pension contributions or special reliefs. Profit after ordinary business costs is £30,000. The company is an ordinary trading company entitled to the 19% small profits rate, with a full 12-month period, no other associated companies and no exempt distributions received.

There is no salary, so employer and employee National Insurance are both £0 and no Employment Allowance is used. All £24,300 post-tax profit is lawfully distributed during 2026/27. No salary means this illustration does not establish a qualifying National Insurance year for the director. Administration costs are excluded.

The sole trader pays 20% Income Tax and 6% Class 4 on £17,430. The company pays 19% on £30,000. The owner's dividend tax is (£24,300 minus £12,570 minus £500) × 10.75%, rounded to £1,207.23 for this illustration. It does not show a company saving. A different salary, retained profits or other personal income would produce a different result.

Filing and practical differences

Sole traders use Self Assessment and may have Making Tax Digital obligations. A company has separate annual accounts, Company Tax Return and confirmation statement obligations. Payroll and the owner's personal tax reporting depend on how money is paid. Receiving salary alone does not automatically mean a Self Assessment return is required.

Limited liability, commercial contracts and investment plans also matter. There is no universal profit threshold at which incorporation is best. Check your own position before changing structure. This service files supported limited-company accounts and CT600 returns, not sole-trader returns or personal salary planning.

Official rates and further reading

• Income Tax and personal allowances
• Self-employed National Insurance
• Dividend tax
• Employer rates for 2026/27
• Employment Allowance eligibility
• Corporation Tax and associated companies