Sole trader vs limited company
At a given profit, which structure leaves you with more? This compares a sole trader against a company paying a small salary and dividends, on 2026/27 rates.
How the comparison works
The sole trader side is simple: income tax on the profit plus Class 4 National Insurance, now 6% between £12,570 and £50,270 and 2% above. The company side has more moving parts. The company pays you a £12,570 salary that carries no income tax or employee NI, pays employer NI above the £5,000 threshold, then pays corporation tax on the profit that is left. Whatever remains is drawn as dividends and taxed at dividend rates after a £500 allowance.
On 2026/27 rates the two routes finish close together. The 6% Class 4 rate keeps sole traders competitive, while corporation tax at 25% with marginal relief above £50,000 and dividend tax on the way out eat into the company advantage. The result is that a company only edges ahead across a narrow band of profit, and the margin is small. Read the difference above as a guide, then weigh it against the extra accountancy and administration a company brings.
Worked example
On a £60,000 profit, a sole trader keeps about £46,111 after £13,889 of income tax and Class 4 NI. The company pays a £12,570 salary, £1,136 of employer NI, £8,796 of corporation tax, then £3,977 of dividend tax on £37,499 of dividends, leaving about £46,091. The gap is £20, so at this profit the sole trader is a little ahead.
Common questions
Is a limited company better than being a sole trader?
Less clearly than it used to be. On 2026/27 rates the take-home difference is small at most profit levels. A company only pulls ahead in a narrow band, and even there the gain is a few hundred pounds, before you count the extra accountancy and administration. Below about £60,500 of profit the sole trader is usually better off.
Why has the limited company advantage shrunk?
Two changes. The self-employed Class 4 National Insurance rate was cut to 6%, which helps sole traders. At the same time corporation tax rose to 25% for larger profits with marginal relief from £50,000, and dividend allowances and tax bands moved against company owners. Together they narrowed the old gap.
How does the company version get taxed?
The company pays corporation tax on its profit after a small director's salary and employer National Insurance. What is left is paid out as dividends, taxed at 8.75%, 33.75% or 39.35% depending on your band, after a £500 dividend allowance. Add it up and compare to a sole trader's income tax plus Class 4 NI.
What salary does this assume?
A director's salary of £12,570, which uses your personal allowance and keeps income tax and employee NI at zero. Employer NI is charged above the £5,000 secondary threshold and is a company cost. A single-director company cannot claim the Employment Allowance, so that employer NI is included.
Are there reasons to incorporate beyond tax?
Yes. Limited liability, a more established look to clients, easier access to some contracts, and the option to leave profit in the company and draw it later. Those can matter more than a small take-home difference, but they are not what this calculator measures.