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Limited Company vs Sole Trader Calculator

Enter your expected profits and target salary to calculate the most tax-efficient setup side-by-side.

2026/27 HMRC rates No signup No data stored Browser-only calculation

Compare Tax Structures

£

Your business profits before taxes or director salary.

£

Recommended: £12,570 (primary threshold, tax-free & NI-free for employee).

Option 1

As a Sole Trader

Simple compliance, personal liability

Taxable Profit £50,000
Income Tax £7,486
National Insurance (Class 4) £2,262
Total Tax Liability £9,748

Annual Take-Home Pay

£40,252

Effective tax rate: 19.5%

Tax Efficient
Option 2

As a Limited Company

Limited liability, separate entity

Company Taxes

Corporation Tax £6,500
Employer National Insurance £1,135

Personal Taxes

Income Tax (on Salary) £0
Dividend Tax £1,200
Total Corporate & Personal Tax £8,835

Annual Take-Home Pay

£41,165

Effective tax rate: 17.7%

Verdict

Calculating verdict...

What is the difference between a Sole Trader and a Limited Company?

The main difference is legal responsibility. A sole trader is legally the same entity as their business. You keep all profits after tax but are personally liable for any business debts.

A limited company is a separate legal entity. The company owns the profits, pays corporation tax, and must register with Companies House. Your personal assets are protected by "limited liability", but you must file company accounts and report salary and dividend draws.

When Does it Make Financial Sense to Incorporate?

For many years, limited companies were vastly more tax-efficient than sole traders. However, with recent freezes in personal thresholds, rises in corporation tax rates (up to 25%), and the 2% increase in dividend tax rates from 6 April 2026, the tipping point has shifted.

Generally, if your business profits are below £30,000, staying as a sole trader is usually more cost-effective due to the simple admin. Once profits exceed £40,000, a limited company structure starts to offer tax savings, though you should factor in professional accountancy fees (typically £100"“£150 per month) before deciding.

What is Dividend Tax in 2026/27?

Dividends are distributions of company profits after Corporation Tax has been paid. They are taxed at lower rates than standard income and are exempt from National Insurance.

⚠️ Important: Dividend tax rates rose by 2 percentage points from 6 April 2026. The 2026/27 rates are:

  • Dividend Allowance: The first £500 of dividends is tax-free.
  • Basic Rate: 10.75% (on total personal income up to £50,270).
  • Higher Rate: 35.75% (on income between £50,271 and £125,140).
  • Additional Rate: 39.35% (on income over £125,140).

Pros & Cons of Each Structure

Choosing a business structure goes beyond pure tax calculations. Admin requirements, creditworthiness, and status play a massive part:

Aspect Sole Trader Limited Company
Liability Unlimited personal liability for debts. Limited liability; personal assets are safe.
Tax Filings Annual Self Assessment (and MTD if applicable). Corporation Tax (CT600), Confirmation Statement, Annual Accounts.
Remuneration Keep all net profit; automatically taxed. Salary + Dividends split (highly controllable).

Making Tax Digital for Limited Companies

A key benefit of a limited company structure is that Making Tax Digital (MTD) for Income Tax does not apply to corporate structures. MTD is only mandatory for sole traders and landlords. If you incorporate, you will not have to file quarterly updates under the MTD for Income Tax regime.

Structure Comparison FAQs

Should I incorporate my sole trader business into a limited company?
It depends on your profits and business goals. Generally, if your business profits exceed £30,000 to £40,000, you may pay less tax overall by incorporating. This is because corporation tax rates (19% to 25%) are lower than personal tax rates, and you can draw profits as dividends. However, limited companies have more reporting duties, strict accounting requirements, and extra setup costs.
What are the main tax differences between a sole trader and a limited company?
Sole traders pay personal Income Tax (20% to 45% or 48% in Scotland) and Class 4 National Insurance (6% to 2%) on all profits. Limited companies are separate legal entities that pay Corporation Tax (19% to 25%) on profits. The director can then draw a combination of tax-free salary (up to the personal allowance) and dividends, which are taxed at lower rates than salary.
How are dividends taxed in 2026/27?
Dividends are taxed based on your personal tax band. In 2026/27, the rates are: a tax-free Dividend Allowance of £500, then 10.75% for basic rate earners, 35.75% for higher rate, and 39.35% for additional rate. Note that these rates rose by 2 percentage points on 6 April 2026.
Does Making Tax Digital (MTD) affect limited companies?
No, the current rollout of Making Tax Digital (MTD) for Income Tax affects only sole traders and landlords. It is phased by qualifying gross income: over £50,000 (from April 2026), over £30,000 (from April 2027), and over £20,000 (from April 2028). Limited companies are not required to join MTD for Income Tax (though they must comply with VAT digital reporting if VAT-registered).
What are the extra admin costs of running a limited company?
Limited companies generally require professional accountancy services to file annual accounts with Companies House and Company Tax Returns (CT600) with HMRC. Accountancy fees typically range from £800 to £2,500 per year, and there is a small fee to register (incorporate) the company.
Can I switch from a sole trader to a limited company later?
Yes, you can register a limited company at any time. When you transfer your sole trader business assets to the new company, you may need to consider capital gains tax relief (Incorporation Relief) and notify HMRC of the transition.