Limited Company vs Sole Trader Calculator

Limited company vs sole trader on 2026/27 rates

A limited company pays 19%–25% corporation tax on profit, then the director pays dividend tax on what is distributed. A sole trader pays income tax and Class 4 NI directly on profit. Which leaves more depends on the profit level and the salary chosen, and the gap has narrowed since dividend rates rose to 10.75% and 35.75% in April 2026.

The table runs our calculator for a single director in England who takes all remaining profit as dividends in the same year. It ignores Employment Allowance (not available to a one-director company), pension contributions and running costs such as accountancy fees, which usually make the company route a little less attractive than shown.

Choosing a director’s salary

The two common choices are £5,000 (the employer NI secondary threshold) and £12,570 (the Personal Allowance). A salary at £5,000 triggers no employer NI. A salary at £12,570 costs £1,136 of employer NI, but that cost and the salary itself are deductible for corporation tax, and the director still pays no income tax or employee NI on it.

A salary above the lower earnings limit of £6,708 gives the director a qualifying year for the State Pension without paying any employee NI, which is why very low salaries below that figure are rarely used.

What actually favours a company

Against that, a company adds an annual Companies House confirmation statement and accounts, a corporation tax return (CT600) and payroll for the director. Contracts inside IR35 also remove most of the advantage, because the fee is taxed as deemed employment income.

• Leaving profit in the company: corporation tax is paid now, but dividend tax is deferred until the money is drawn, which suits people who do not need all the profit each year.
• Employer pension contributions: paid by the company, deductible for corporation tax and free of NI, often the most efficient way to extract profit.
• Spreading income between years or between shareholders who are genuinely involved in the business.
• Limited liability and, for some clients, credibility – though lenders and landlords often ask for personal guarantees anyway.

Director’s loans and common mistakes

Money a director takes that is not salary, dividends or expense repayments goes into the director’s loan account. If more than £10,000 is owed at any point in the year the company must treat it as a benefit in kind and report it, and if the loan is not repaid within 9 months of the year end the company pays a temporary corporation tax charge on it, reclaimable after repayment.

• Declaring dividends with no board minute or voucher, or without enough retained profit.
• Forgetting that dividends above the director’s allowances must go on a Self Assessment return.
• Paying a salary that is not run through payroll and reported in real time to HMRC.

A quick checklist before you incorporate

You can incorporate an existing sole trade later, so there is no need to decide on day one. Many people start as a sole trader and review the decision once profits are steady and above the higher rate threshold.

• Work out how much profit you need to draw each year. The company route helps most with profit you can leave in the business.
• Check whether your contracts are likely to be inside IR35. If so, the company adds cost without the tax advantage.
• Budget for an accountant, business bank account and payroll software. These ongoing costs can outweigh a small tax saving.
• Decide who will own shares. Dividends follow shareholdings, so ownership needs to reflect who is genuinely involved.
• Consider whether you need limited liability or just good insurance.