Sole Trader vs Limited Company in 2026/27: Which Leaves You More Money?

Sample article written by CiteMonthly to show quality, not a real client. "Harbour Lane Accountants (sample)" is a fictional firm. This is general information based on GOV.UK rates for 2026/27, not personal tax advice.

Short answer: In the 2026/27 tax year, if you take all of your profit out of the business, being a sole trader leaves you with more money at every profit level we tested, from £30,000 to £100,000. At £50,000 of profit, a sole trader keeps about £40,268. A one-person limited company paying a £12,570 salary and the rest as dividends keeps about £38,862, and that's before the company's extra running costs. A limited company mainly pays off when you can leave profit in the company, or when limited liability matters to you.

What changed for 2026/27?

Several rates now work against the traditional "salary plus dividends" setup:

• Dividend tax went up. From 6 April 2026 the rates are 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate). The tax-free dividend allowance stays at £500 [2].
• Employer National Insurance is 15% on salary above £5,000 a year [4].
• Sole traders pay Class 4 National Insurance of just 6% on profits between £12,570 and £50,270, and 2% above that. If your profits are £7,105 or more, Class 2 is treated as paid, which protects your National Insurance record [3].
• Corporation Tax is 19% on profits up to £50,000 and 25% above £250,000. In between, Marginal Relief applies [5] [6], which makes the effective rate on that slice of profit 26.5% [7].

Income tax bands are unchanged: a £12,570 Personal Allowance, 20% up to £50,270, 40% up to £125,140 and 45% above. Bands differ in Scotland [1].

How is a sole trader taxed?

You pay Income Tax and Class 4 National Insurance on all of your profit through Self Assessment, whether you spend it or not [9] [3].

Example: £50,000 profit

• Income Tax: (£50,000 − £12,570) × 20% = £7,486 [1]
• Class 4 NI: £37,430 × 6% = £2,245.80 [3]
• Take-home: £40,268

How is a limited company owner taxed?

The company is a separate legal entity, and money comes out of it in layers [9] [11]:

1. Salary. We used £12,570, which is the employee National Insurance threshold, so you pay no employee NI and no Income Tax on it [4] [1]. The company pays 15% employer NI on the £7,570 above £5,000, which is £1,135.50 [4]. The £10,500 Employment Allowance [15] doesn't help here. If the company's only director is also its only employee paying employer NI, it can't claim the allowance [8].
2. Corporation Tax on the remaining profit [5].
3. Dividends from the post-tax profit. The company can't deduct them for Corporation Tax, and it can't pay out more than its available profits [11]. You pay dividend tax above the £500 allowance [2].

Example: £50,000 profit

• Profit after salary and employer NI: £36,294.50
• Corporation Tax at 19%: £6,896 [5]
• Dividends paid out: £29,399
• Dividend tax: £500 at 0%, then £28,899 × 10.75% = £3,107 [2]
• Take-home: £38,862 (salary £12,570 + dividends £29,399 − £3,107)

We also tested a lower £5,000 salary, which avoids employer NI entirely. At £50,000 of profit it leaves you with about £38,399, which is less again.

How do the two compare at different profit levels?

Assumptions: 2026/27 rates [1]–[7]; England, Wales or Northern Ireland; no other income; one director who is also the only shareholder; £12,570 salary; no pension contributions, student loan or VAT effects; before accountancy and company running costs. At £80,000 and £100,000 the company pays Corporation Tax with Marginal Relief [7].

The reason is simple. Every extra £1 of profit taken as a basic-rate dividend loses about 27.7% (19% Corporation Tax, then 10.75% on what's left). A basic-rate sole trader loses 26% (20% Income Tax plus 6% NI). At higher rates the gap gets wider.

When does a limited company still make sense?

1. You don't need all the profit. Money left in a company has only paid Corporation Tax. Take £80,000 of profit and draw just enough to stay in the basic-rate band (£50,270 in salary and dividends). You'd take home £46,271 and leave £14,776 in the company. A sole trader with the same profit who spent the same £46,271 would have about £11,440 left after tax. Bear in mind that this is a deferral, not an exemption. Dividend tax is due when the money comes out: about £1,590 if it's paid in a later year at the 10.75% rate, or about £5,280 at 35.75% [2].

2. You want limited liability. As a sole trader you're personally responsible for all of the business's debts. A company owner's liability is limited to their investment, although you may still need business insurance [9].

3. You expect to grow fast. GOV.UK notes that you can switch structures later, and that it's usually easier to go from sole trader to limited company than the other way [9]. So starting as a sole trader keeps your options open.

What extra admin and costs come with a limited company?

• Set-up and annual fees: £100 to incorporate online, plus a £50 confirmation statement fee each year when you file online [12].
• Identity verification: Since 18 November 2025, directors and people with significant control have been legally required to verify their identity with Companies House. It's free through GOV.UK One Login, and when you need to do it depends on your role and when you took it on [13].
• Director duties: You must keep company records, prepare and file annual accounts and a Company Tax Return, and pay Corporation Tax. You stay legally responsible even if you use an accountant, and you can be fined, prosecuted or disqualified if you don't meet these duties [10].
• Payroll and dividend paperwork: To pay yourself a salary you must register the company as an employer. Each dividend needs a directors' meeting with minutes, plus a dividend voucher [11].

What admin does a sole trader have?

You can start trading straight away, but you must register for Self Assessment if your trading income is more than £1,000 in a tax year [9]. Making Tax Digital for Income Tax also applies to sole traders. You had to start from 6 April 2026 if your qualifying income was over £50,000 in 2024/25. The threshold drops to over £30,000 (from April 2027) and then over £20,000 (from April 2028) [14].

A quick decision checklist

1. How much profit will you actually spend? If it's nearly all of it, the numbers favour staying a sole trader.
2. Will you regularly leave more than a few thousand pounds in the business? Then run the retained-profit numbers above with your accountant.
3. Does personal liability for business debts worry you? That's a point in favour of a company [9].
4. Are you ready for payroll, annual accounts, a confirmation statement and identity verification? [10] [12] [13]
5. Do you live in Scotland or have other income? Your numbers will be different, so get personalised advice [1].

Frequently asked questions

Is it worth going limited at £50,000 profit in 2026/27?

On tax alone, not if you take all the profit out. Our example shows a sole trader keeping about £1,406 more at £50,000 before the company's extra costs.

What are the dividend tax rates for 2026/27?

10.75% at the basic rate, 35.75% at the higher rate and 39.35% at the additional rate, with a £500 dividend allowance [2].

Can a one-person company claim the Employment Allowance?

No. If the company has only one director, that director can't be the only employee liable for employer National Insurance [8].

What salary should a director take in 2026/27?

In our sole-director example, a £12,570 salary gave more take-home than a £5,000 salary, even after £1,135.50 of employer NI. The best figure depends on your circumstances [4].

Do sole traders need Making Tax Digital in 2026?

Yes, if your qualifying income from self-employment and property was over £50,000 in 2024/25 [14].

Weighing it up? Harbour Lane Accountants (sample) can run these figures on your real numbers before you register anything. (Sample call to action; fictional firm.)

Sources

1. GOV.UK, Income Tax rates and Personal Allowances (current tax year 6 April 2026 to 5 April 2027). https://www.gov.uk/income-tax-rates
2. GOV.UK, Tax on dividends (rates from 6 April 2026 to 5 April 2027). https://www.gov.uk/tax-on-dividends
3. GOV.UK, Self-employed National Insurance rates (2026 to 2027). https://www.gov.uk/self-employed-national-insurance-rates
4. HMRC, Rates and thresholds for employers 2026 to 2027. https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2026-to-2027
5. GOV.UK, Corporation Tax rates and reliefs. https://www.gov.uk/corporation-tax-rates
6. HMRC, Marginal Relief for Corporation Tax. https://www.gov.uk/guidance/corporation-tax-marginal-relief
7. HMRC Company Taxation Manual, CTM03925: marginal relief formula and 26.5% marginal rate. https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm03925
8. GOV.UK, Employment Allowance: check if you're eligible. https://www.gov.uk/claim-employment-allowance/eligibility
9. GOV.UK, Set up a business (sole trader vs limited company comparison). https://www.gov.uk/set-up-business
10. GOV.UK, Running a limited company: your responsibilities. https://www.gov.uk/running-a-limited-company
11. GOV.UK, Taking money out of a limited company. https://www.gov.uk/running-a-limited-company/taking-money-out-of-a-limited-company
12. Companies House, Companies House fees. https://www.gov.uk/government/publications/companies-house-fees/companies-house-fees
13. Companies House, Verifying your identity for Companies House. https://www.gov.uk/guidance/verifying-your-identity-for-companies-house
14. HMRC, Find out if and when you need to use Making Tax Digital for Income Tax. https://www.gov.uk/guidance/find-out-if-and-when-you-need-to-use-making-tax-digital-for-income-tax
15. GOV.UK, Employment Allowance: what you'll get. https://www.gov.uk/claim-employment-allowance