Sole trader vs limited company: the tax comparison

A sole trader is taxed once, on the full trading profit, through Income Tax and Class 4 National Insurance. A limited company is taxed twice: Corporation Tax on the company's profit, then dividend tax on whatever you actually draw out. Which comes out lower depends on the profit level and, critically, how much of that profit you need to take out of the business this year.

Sole trader: taxed on the full profit, whether you draw it or not

As a sole trader, Income Tax and National Insurance are charged on your entire trading profit for the year, regardless of how much cash you actually withdraw. For 2026/27, the personal allowance is £12,570. Above it, the first £37,700 of taxable profit is charged at 20%, the next slice at 40%, and taxable profit above £125,140 at 45% (England, Wales and Northern Ireland; Scotland has separate bands and is not covered here). The allowance is also withdrawn by £1 for every £2 of profit above £100,000, running out entirely at £125,140. Profit inside that band is effectively taxed at 60% rather than 40%. On top of Income Tax, Class 4 National Insurance charges 6% of profit between £12,570 and £50,270, and 2% above that.

Limited company: Corporation Tax first, then dividend tax on what you draw

A limited company pays Corporation Tax on its profit: 19% up to £50,000 of profit, 25% above £250,000, with marginal relief tapering the rate between the two. Only what you then draw as dividends is taxed on you personally, after a £500 dividend allowance, at 10.75%, 35.75% or 39.35% depending on your other income. Profit left in the company is not taxed on you personally until you draw it, which is the main lever that makes a limited company more efficient when you do not need all of the profit as income this year.

Why “desired drawings” changes the answer

The comparison is not just profit versus profit, it is profit versus how much of it you need in your pocket. A sole trader with £80,000 profit pays Income Tax and Class 4 NI on the full £80,000 whether they spend it all or save most of it. The same person trading through a limited company, drawing only £40,000 in dividends and leaving the rest retained, pays Corporation Tax on the full £80,000 but dividend tax on only £40,000. Model your own numbers with the Sole Trader vs Limited Company calculator rather than relying on a rule of thumb, the crossover point moves with both profit and drawings.

What the pure tax comparison leaves out

A limited company brings running costs a sole trader does not have: annual accounts and a Corporation Tax return, a registered office, and typically an accountant's fee to handle it, all left out of this comparison and worth weighing against any tax saving.

There is also a Making Tax Digital difference that a tax-only comparison misses entirely. Limited companies are out of scope for Making Tax Digital for Income Tax. A sole trader whose qualifying income crosses the MTD threshold must keep digital records and send quarterly updates to HMRC, an ongoing compliance obligation a limited company (filing its own separate Corporation Tax return instead) does not have. See the Making Tax Digital guide for what that involves.

Next steps

Enter your trading profit and how much you expect to draw this year into the Sole Trader vs Limited Company calculator to see the tax and NIC total under each structure side by side, including how much of a dividend the company can actually afford to pay after Corporation Tax.