Sole Trader vs Ltd Comparison Table

The table runs the same profit through both structures at levels from £20,000 to £100,000, showing total tax and take-home pay side by side. On the sole trader side each figure passes through the full Income Tax bands, at 20%, 40% and 45% once the £12,570 Personal Allowance is used, together with Class 4 National Insurance at 6% between £12,570 and £50,270 and 2% above that. What is left is the net income the sole trader keeps, with nothing further deducted, because no company sits between the business and the person running it.

The company column assumes the extraction strategy most owner-directors actually use. Salary is set at £12,570 to use the Personal Allowance while keeping National Insurance down, and everything above that is taxed as company profit before being drawn as dividends. Corporation Tax follows the marginal relief formula for profits between £50,000 and £250,000, so the effective rate climbs from 19% towards 25% across that range. Dividend tax then applies at 10.75%, 35.75% and 39.35% after the £500 dividend allowance. Running costs come off too: the table allows £1,200 of accountancy, deducted as a company expense before Corporation Tax, which keeps the comparison like for like. Filing accounts at Companies House is free, and the yearly Confirmation Statement costs £50 online or £110 on paper on top.

On 2026/27 rates the table makes uncomfortable reading for incorporation. Assuming that £12,570 salary with the rest paid out as dividends, plus £1,200 of accountancy and £1,136 of employer NI, a sole trader on £50,000 of profit pays £7,486 of Income Tax and £2,246 of Class 4 NI, a total of £9,732, and takes home £40,268. The company pays £12,006 once Corporation Tax, dividend tax, employer NI and accountancy are counted, leaving £37,994, so the sole trader is £2,274 ahead. At £75,000 the figures are £20,189 against £22,163, and at £100,000 £30,689 against £35,357. Incorporating no longer cuts the tax bill for an owner who draws everything out each year.

Simplicity adds to that lead. Keeping to one Self Assessment a year, rather than a CT600, a director's own return and a Confirmation Statement, saves £1,200 to £2,400 in accountancy, with no statutory accounts, no audit and no annual confirmation fee. It suits solo professionals such as consultants and freelancers, side hustles, seasonal businesses, anyone testing a market, and any business consistently under £40k of profit. The price of that simplicity is that nothing legal stands between the business and your personal assets.

What a company still offers is flexibility rather than a smaller bill. Profit can be left inside it and drawn in a later, lower-rate year, employer pension contributions are deductible and carry no National Insurance, and those contributions are the usual way of managing the 60% effective rate that bites between £100,000 and £125,140 as the Personal Allowance tapers away. Limited liability, a more established look to clients, salary sacrifice options, control over the timing of dividends and the ability to split shares with a spouse sit on the same side of the ledger. Against roughly £1,200 to £1,800 a year for accounts, the company route costs around £4,700 more at £100,000 of profit.

Contractors have to settle IR35 before any of this matters. A contract inside the off-payroll working rules is taxed as though it were employment, which cancels the company's tax advantage, while an outside-IR35 contract keeps it. Since April 2021 medium and large clients determine the status, and where the client is small (meeting two of: turnover up to £15 million, balance sheet up to £7.5 million, 50 or fewer employees), the contractor still decides. HMRC's CEST tool on gov.uk gives a first view without binding anyone. Sole traders fall outside IR35, their employment status judged under separate rules, which is why some contractors take that route or use an umbrella company.

Switching is best driven by whether you can leave profit inside the company, or need liability protection, rather than by crossing a profit line. Registering at Companies House costs £100 online or £124 by post. Business assets such as goodwill and equipment move across, the sole trader business is closed down, and the company's first year end accounts fall due 21 months after incorporation and yearly thereafter. Incorporation Relief can defer the Capital Gains Tax on transferring business assets, while moving property in can trigger Stamp Duty Land Tax. An accountant charging £500 to £2,000 for the transition usually earns it back in mistakes avoided.