Sole Trader vs Limited Company: Which Is Best in 2026/27?

Choosing between being a sole trader and setting up a limited company is one of the biggest decisions you'll make when you start or grow a business, and one of the questions we're asked most often by business owners in Bristol and across the UK. It affects how much tax you pay, how much admin you take on, what's on public record and how exposed your personal finances are if things go wrong.

The numbers have also shifted. Employer National Insurance rose to 15% on salaries above £5,000 in April 2025, and dividend tax rates went up from 6 April 2026. So even if a limited company was the obvious choice a few years ago, it's worth checking again. This guide compares the two structures side by side, then works through real examples using 2026/27 rates.

The short answer

If you plan to take all of your profit out of the business as income, our worked examples below show a sole trader paying slightly less tax and National Insurance than a limited company at £30,000, £50,000 and £80,000 of profit in 2026/27. A limited company can still be the better choice if you want to protect your personal assets, plan to leave profits in the business to reinvest, want to bring in shareholders or investors, or work with clients who prefer to deal with companies. The right answer depends on your circumstances, so it's worth running your own numbers.

Sole trader vs limited company at a glance

How each structure is taxed

As a sole trader, your business profit is your personal income. Outside Scotland, you pay Income Tax on it through Self Assessment at 20% on profits between £12,570 and £50,270, 40% above that, and 45% above £125,140. You also pay Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% above. If your profits are £7,105 or more, Class 2 National Insurance is treated as paid, so you keep building your State Pension record without a separate payment. You're taxed on all of your profit, whether you take it out of the business or leave it in the bank.

A limited company pays Corporation Tax on its profits: 19% on profits of £50,000 or less, 25% on profits over £250,000, and a tapered rate in between because of marginal relief. You then pay personal tax on what you take out. A director's salary is a business expense for the company, but it's subject to Income Tax and National Insurance through PAYE, including employer National Insurance at 15% on salaries above £5,000. Dividends come out of profits after Corporation Tax. There's no National Insurance on them, and above the £500 dividend allowance they're taxed at 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate) from 6 April 2026. Our guide to salary or dividends explains the options in more detail.

Worked examples for 2026/27

These examples compare the same profit, before the owner takes any pay, under each structure. To keep them simple and comparable, they assume:

• Income Tax rates for England, Wales and Northern Ireland (Scotland has different rates on salary and trading profits)
• No other income, pension contributions or student loan repayments
• The limited company has one director who is its only employee, so it can't claim the Employment Allowance
• The director takes a salary of £12,570 and the rest of the profit, after Corporation Tax, as dividends
• Accountancy fees and other running costs are left out, as they apply to both

At £30,000 of profit, the sole trader takes home about £1,065 more. The company's profit after the director's salary and employer National Insurance is £16,295, which is taxed at the 19% small profits rate before being paid out as dividends.

At £50,000, the gap is about £1,406 in the sole trader's favour. All of the director's dividends still fall within the basic rate band, so they're taxed at 10.75% above the £500 allowance.

At £80,000, the sole trader takes home about £1,947 more. Here the company's taxable profit of £66,295 falls between £50,000 and £250,000, so Corporation Tax is charged at 25% less marginal relief, and dividends above the basic rate band are taxed at 35.75%.

What the numbers tell you

• When you take all of your profit out, the sole trader route leaves slightly more in your pocket at all three levels in 2026/27: roughly £1,065, £1,406 and £1,947 a year.
• The main reasons are employer National Insurance on the director's salary, Corporation Tax on the company's profit, and the higher dividend tax rates from April 2026.
• A lower salary doesn't close the gap in these examples. With a £5,000 salary, the director's take-home falls to £23,941, £38,399 and £55,012 respectively.
• Tax isn't the only cost. Accountancy fees are usually higher for a company because there's more to prepare and file, which widens the gap further.

The picture changes if you don't need all the profit. At £80,000, if the director takes dividends only up to the top of the basic rate band (£37,700), dividend tax falls to £3,999, take-home is £46,271, and £14,776 stays in the company after Corporation Tax. The total tax paid for the year is then about £18,953, compared with £22,289 for the sole trader. That retained profit will be taxed again when it's eventually taken out, so this is a deferral rather than a saving, but it's valuable if you want to reinvest in the business. Employer pension contributions from the company, which are usually an allowable business expense and free of National Insurance, can shift the balance too.

When a limited company makes sense

• You want to separate business debts from your personal finances, especially if you're taking on premises, stock, staff or other large commitments
• You expect to make more profit than you need to live on, and want to reinvest it in the business
• You plan to bring in co-owners, shareholders or investors
• Your clients prefer, or insist on, working with limited companies
• You want to make larger pension contributions through the business
• You're building a business you may want to sell one day

When staying a sole trader makes sense

• You need to draw all or most of your profit to live on
• You want the simplest admin and the lowest accountancy costs
• Your business carries little financial risk
• You value privacy, with nothing about you on a public register
• You're testing a new idea and may change direction

Bear in mind that sole traders now face more admin too. Making Tax Digital for Income Tax requires digital records and quarterly updates from April 2026 if your qualifying income is over £50,000, from April 2027 if it's over £30,000, and from April 2028 if it's over £20,000.

How to switch from sole trader to limited company

Many businesses start as sole traders and incorporate as they grow. If you decide to make the move, the main steps are:

• Check the numbers and the timing with an accountant before you commit
• Register the company with Companies House, which costs £100 online and is usually done within 24 hours; you'll usually be set up for Corporation Tax at the same time
• Open a business bank account in the company's name
• Register the company as an employer with HMRC before you pay yourself a salary
• Tell HMRC you've stopped trading as a sole trader, and send a final Self Assessment tax return for your self-employment
• If you're VAT registered, get advice on moving your VAT registration to the company or cancelling it
• Update your contracts, invoices, insurance, website and payment details so customers deal with, and pay, the company

Moving business assets or goodwill into the company can have tax consequences, including Capital Gains Tax, so take advice before transferring anything across. Once the company is running, you'll also take on a director's legal duties, which our guide to limited company director duties explains.

Get advice before you decide

We're a CIMA-qualified practice in Bristol, working with sole traders and limited companies across Bristol and the UK. We can run your own figures, explain the trade-offs and, if you decide to incorporate, help you make the switch smoothly. Our Sole Trader plan starts from £45 a month and our Limited Company plan from £150 a month (both exc VAT). See our pricing, find out more about our personal tax and Corporation Tax services, or get in touch.