Sole trader vs limited company: a side-by-side comparison for 2026/27

Choosing between sole trader and limited company is the most common structural question UK business owners ask. The right answer depends on how much you earn, how much you need to draw personally, your appetite for admin, and your tolerance for liability.

This guide sets out the rules, the numbers for the 2026/27 tax year, and the specific trade-offs in each direction. No spin. Just the mechanics.

The two structures in one paragraph each

Sole trader. You and the business are the same legal entity. You register with HMRC for Self Assessment, pay Income Tax and National Insurance on your business profits, and you are personally liable for the debts of the business. Accounts are private.

Limited company. The business is a separate legal person, incorporated at Companies House. The company pays Corporation Tax on its profits. You, as director and shareholder, pay yourself through salary, dividends, or a mix of both. Your liability is limited to the share capital you put in. Accounts are filed publicly.

Tax rates for 2026/27

Sole trader

Profits are taxed through Self Assessment using the standard Income Tax bands:

On top of Income Tax, sole traders pay Class 4 National Insurance: 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270. Class 2 NI was effectively abolished from April 2024 but voluntary contributions remain available for state pension purposes.

Limited company

Corporation Tax has a tiered rate:

• Small profits rate: 19% on profits up to £50,000
• Marginal relief: tapered rate between £50,000 and £250,000
• Main rate: 25% on profits above £250,000

Once profits are inside the company, money reaches the owner through salary (taxed as employment income) or dividends (taxed at 8.75% basic, 33.75% higher, 39.35% additional). Dividends have a £500 tax-free allowance for 2026/27.

Worked example: £80,000 profit

Assume a single-owner business with £80,000 of trading profit and no other income.

As a sole trader

• Income Tax on £67,430 taxable income: £7,540 at 20% plus £11,892 at 40% = £19,432
• Class 4 NI: £2,262 at 6% plus £594 at 2% = £2,856
• Total tax: £22,288. Take-home: £57,712.

As a limited company, £12,570 salary plus dividends

• Salary £12,570, no Income Tax, no employee NI
• Employer NI on salary above £5,000 secondary threshold: roughly £1,136 at 15%
• Corporation Tax on £66,294 profit after salary/employer NI: £12,595 at 19%
• Distributable profit: £53,699
• Dividend tax: £500 allowance at 0%, then £37,200 at 8.75% = £3,255, then £15,999 at 33.75% = £5,400
• Total tax (company and personal): roughly £22,386. Take-home: £57,614.

The headline surprise: at £80k, the sole trader actually edges ahead by around £100 on take-home, and the two structures land within a hundred pounds of each other. The tax advantage of incorporation has narrowed significantly since 2022 because of the Corporation Tax rise, higher dividend rates, and the reduced dividend allowance. The structural decision is no longer purely about tax.

Non-tax factors that actually decide it

Liability. A limited company protects personal assets from business debts, with the important exception of personal guarantees (which lenders routinely ask for). If your business carries real risk, incorporation matters.

Profit retention. If you earn more than you need to live on, a limited company is better. You pay Corporation Tax once, leave profits inside the company, and only pay personal tax when you draw them out. Sole traders pay full Income Tax on every pound, whether they spend it or not.

Admin burden. Sole traders file one Self Assessment return per year. Limited companies file annual accounts, a Confirmation Statement, a Corporation Tax return, and usually operate a payroll scheme. You will pay more in accountancy fees.

Public accounts. Limited company accounts are public on Companies House. Anyone, including competitors, can see them. Sole trader accounts are private.

Perception. For some industries and B2B clients, "Ltd" carries weight. For others nobody cares.

Pension and family tax planning. Limited companies give access to employer pension contributions, which are deductible against Corporation Tax, and to spouse shareholder planning where circumstances allow.

When sole trader is usually the right answer

• Profits under about £30,000
• Business carries minimal liability risk
• Minimal admin appetite
• You need to draw every pound you earn

When a limited company is usually the right answer

• Profits over about £50,000 and growing
• You can leave profits inside the business
• Liability exposure is material
• You want to build a sellable asset
• You want to contribute meaningfully to a pension through the business

The in-between zone

Between roughly £30,000 and £50,000 of profit, the answer depends on the details. Your drawings pattern, your pension strategy, whether you have a spouse who can hold shares, whether you trade through a recognisable brand, and your appetite for admin all shift the balance.

Switching later

You can incorporate a sole trader business at any point. The transfer is governed by TCGA 1992 s162 (incorporation relief) and can be structured tax-efficiently. You cannot easily go the other way once incorporated without triggering a disposal of the trade, so think carefully before incorporating.

The bottom line

The old rule of thumb "incorporate above £30k" is out of date. For 2026/27, the tax arbitrage between the two structures has shrunk considerably. The decision should be driven by liability, profit retention, admin tolerance, and long-term plans, with the tax comparison as a cross-check, not the headline.

If you want us to run the numbers on your specific situation, the S&J quote generator gives you a fixed price for either structure in under two minutes.