Sole Trader vs Limited Company Calculator

A sole trader is taxed directly on business profits, with Income Tax at 20%, 40% and 45% and Class 4 National Insurance at 6% and 2% on top. Class 2 NI disappeared in April 2024. Setting up takes no time at all, since it amounts to registering with HMRC and trading, and the record keeping stays light, meaning income and expense records plus one Self Assessment return a year. The trade off is that there is no legal separation between you and the business, so personal assets sit behind its debts.

A limited company pays Corporation Tax on its profits, at 19% below £50,000 and rising to 25% above £250,000 with marginal relief in between. What is left belongs to the company rather than to you, so the director and shareholder extracts it through some mix of salary and dividends. Dividends carry no National Insurance, which is the source of most of the tax advantage people associate with incorporating. Against that, the company files annual accounts at Companies House, keeps statutory registers and carries a heavier regulatory load than a sole trader ever sees.

On 2026/27 rates the arithmetic is less flattering to incorporation than it once was. Assume a £12,570 salary with everything else drawn as dividends, plus £1,200 of accountancy and £1,136 of employer NI on that salary. At £30,000 of profit the sole trader pays £4,532, being £3,486 of Income Tax and £1,046 of Class 4 NI, against £6,464 for the company once £2,868 of Corporation Tax and £1,261 of dividend tax are added to those fixed costs, leaving the sole trader £1,932 better off. The same pattern runs up the scale, with £9,732 against £12,006 at £50,000, £22,289 against £24,802 at £80,000 and £30,689 against £35,357 at £100,000.

That gap widens with profit because dividends above the basic rate band are taxed at 35.75% while Corporation Tax carries a 26.5% marginal rate between £50,000 and £250,000. Running costs pull the same way. A company needs annual accounts, a CT600, payroll and a personal tax return covering the dividends, with accountancy alone typically running £1,000 to £1,800 a year, against the £1,200 to £2,400 a sole trader saves by keeping to a single Self Assessment. Where profits are modest and drawn out in full, the simpler structure usually leaves more in your pocket.

Tax is not the whole decision. A company gives limited liability, so a business failure does not automatically reach your house and savings. Pension contributions made by the company are tax free, with no National Insurance on either side. Salary sacrifice opens up cycle to work schemes, electric cars, gym membership and similar benefits on efficient terms. Shares can be issued to bring in partners or investors, and buying assets through the company reduces how much profit has to be extracted as dividends in the first place. Some clients also read a limited company as the more established supplier.

Contractors face a further complication. The off-payroll working rules, IR35, catch limited company contractors who are employees in all but name, and a contract inside IR35 is taxed as employment, which removes the company advantage almost entirely. Outside IR35 the usual efficiency applies. Since April 2021 medium and large clients determine the status themselves, while for small clients (those meeting two of: turnover up to £15 million, balance sheet up to £7.5 million, 50 or fewer employees) the contractor still makes the call. Sole traders fall outside IR35 altogether, although their employment status is tested under separate rules.

Moving from sole trader to company is a one way decision in practice, because flipping back and forth costs more than it saves. Registering at Companies House costs between £12 and £100. Existing business assets such as goodwill and equipment transfer across, the sole trader business is closed, and the company's first year end accounts follow. Incorporation relief can defer the Capital Gains Tax on transferring business assets, while moving property in may trigger Stamp Duty Land Tax, with the 5% surcharge in play for buy to let portfolios. An accountant charges £500 to £2,000 to handle the transition and usually saves that in avoided mistakes.