Limited company vs sole trader: which pays less tax in 2026/27?

What changed with employer National Insurance

From 6 April 2025 employer NI rose from 13.8% to 15% and the secondary threshold fell from £9,100 to £5,000 a year. The Employment Allowance rose to £10,500, but a company whose only employee is a director paid above the secondary threshold cannot claim it. So a typical one-person company pays employer NI on director salary above £5,000.

The best director salary for 2026/27

For a sole director without Employment Allowance, a salary of £12,570 generally beats £5,000. The extra £7,570 of salary costs £1,135.50 in employer NI, but salary and employer NI both reduce Corporation Tax. At a 19% Corporation Tax rate, paying that slice as salary gives you £7,570 tax-free; paying it as dividends gives about £7,051. At 25% or in the marginal relief band, salary wins by more.

£12,570 also sits above the lower earnings limit (£6,708 for 2026/27), so it earns a qualifying year for the State Pension, and below the employee primary threshold, so no employee NI is due. Where the company can claim Employment Allowance (for example, with another employee), £12,570 is clearly optimal.

Tax comparison at £30,000, £50,000 and £100,000

Assumptions: England, 2026/27, no other income, the company pays a £12,570 salary and distributes all remaining post-tax profit as dividends, no Employment Allowance. Accountancy and admin costs, which are usually higher for a company, are ignored.

How the £50,000 company figure is built

• Salary £12,570; employer NI (£12,570 - £5,000) x 15% = £1,135.50
• Taxable profit: £50,000 - £13,705.50 = £36,294.50; Corporation Tax at 19% = £6,895.95
• Dividends available: £29,398.55
• Dividend tax: £500 at 0%, £28,898.55 x 10.75% = £3,106.59
• Take-home: £12,570 + £29,398.55 - £3,106.59 = £38,861.95

When a limited company still makes sense

The comparison changes if you do not need all the money. Profits left in the company have only paid Corporation Tax (19% to 26.5% marginal). At £100,000 profit, if you take dividends only up to the higher-rate threshold (£37,700 on top of the salary), your personal take-home is about £46,271 with dividend tax of £3,999, and roughly £29,476 stays in the company to fund investment, smooth income or be extracted later.

• Employer pension contributions are deductible for Corporation Tax and free of NI, often the most efficient way to extract profit.
• A spouse or partner who genuinely owns shares can use their own allowance and basic rate band, subject to the settlements rules.
• Limited liability, perceived credibility with some clients, and outside-IR35 contracting are non-tax reasons.
• Against that: annual accounts and confirmation statements, Companies House identity verification, payroll, and public filing of your details.

Scotland

Scottish taxpayers pay Scottish rates on salary and sole trader profits, which are higher above about £31,000, while dividends are taxed at UK rates. This narrows the sole trader advantage in Scotland at higher profits, so run both scenarios through a calculator.

Running costs and admin compared

A limited company has fixed costs and filings that a sole trader does not. These often decide the question at lower profits.

Extracting profit through an employer pension

An employer pension contribution is the cheapest way to take profit out of a company, because it is deductible for Corporation Tax and free of NI and dividend tax.

Take the £50,000 profit example. Taking everything as salary and dividends leaves £38,861.95 take-home. If the company instead pays £10,000 into the director's pension, Corporation Tax falls to £4,995.96 (from £6,895.96) and take-home falls to £31,632.70. So the £10,000 pension costs only £7,229.25 of spendable income. A sole trader making a £10,000 gross personal contribution gets 20% relief but no NI saving, so the same contribution costs them £8,000.

Contributions must be "wholly and exclusively" for the business, which is rarely questioned for working directors on reasonable pay. They also count towards the £60,000 annual allowance.

Switching from sole trader to limited company

• Form the company and open a business bank account in its name. Company money is no longer your money.
• Tell HMRC you have stopped self-employment. Your final Self Assessment return covers profits up to the date you stopped.
• Register the company for Corporation Tax within 3 months of starting to trade, and set up PAYE before the first payroll.
• Transfer contracts, insurance and, if registered, VAT. A VAT number can sometimes be transferred to the company.
• Moving assets such as goodwill or equipment into the company is a disposal for CGT. Incorporation relief can defer the gain if the whole business is transferred in exchange for shares.