Sole trader
Best£51,722Value to you
- Profit
- £70,000
- Income tax
- -£15,432
- Class 2 and Class 4 NI
- -£2,846
- In your pocket
- £51,722
Simplest to run: one Self Assessment return, no company filings, no payroll.
Should I incorporate?
Compares the total tax on the same profit as a sole trader and as a limited company, with the running costs of the company included.
On the figures so far
Staying a sole trader leaves you £1,246 better off a year.
The options are within £0 of each other, which is close enough that rounding in the figures you entered could change the order. To be surer: entering exact figures rather than rounded ones.
Refine it in 3 questions below.
The decision
Staying a sole trader leaves you £1,246 better off a year.
- 19.7%Corporation tax rate
- 6%Class 4 NI rate
- 10.75%Dividend ordinary rate
- £1,246Difference a year
Why
- As a sole trader the whole £70,000 is taxed as your income, and Class 4 NI is charged at 6% between £12,570 and £50,270.
- Through a company, profit bears corporation tax at 19.7% first, and what is left is taxed again as a dividend — but dividends carry no National Insurance, which is where the saving comes from.
- The April 2026 dividend rates (10.75% and 35.75%) narrowed that saving by two points, and employer NI now starts at £5,000, so the gap is smaller than older comparisons suggest.
- Tax is rarely the deciding factor on its own. Limited liability, winning contracts that require a company, and the extra admin all weigh here and none of them are numbers.
Does this apply to you?
Each of these has to be true. Where your answers settle it we have said so; where they cannot, the test is yours to check.
Your trade is one that can be carried on through a company. — we cannot tell from your answers
Companies Act 2006 Part 2
The profit is high enough that the tax saving exceeds the cost of running a company. — met, on your answers
Not a tax rule — the arithmetic
You do not need to draw every pound of the profit as cash each year. — not met, on your answers
Most of the advantage is in leaving profit in the company or routing it to a pension. If you need all of it as spending money, the two structures converge and the company's costs decide it.
Not a tax rule — where the saving comes from
If you work through an intermediary for a single client, you have considered IR35. — we cannot tell from your answers
ITEPA 2003 Part 2 Chapter 8; Chapter 10 for public sector and large clients
You are comfortable with your accounts and the directors' details being public. — we cannot tell from your answers
Companies Act 2006 s. 441
What this does not model
- Assumes a salary at the personal allowance and no Employment Allowance, which is the usual sole-director position.
- IR35 is not modelled. If your work would be caught by it, the company saving largely disappears.
- One-off costs of incorporating, and of closing a company later, are not included.
- Business Asset Disposal Relief on a future sale or liquidation can favour a company and is not modelled.
This is information, not tax or financial advice. It shows how the rules apply to the figures you entered — it does not know the rest of your circumstances. Worth checking with an accountant before you act.
Rates as at 6 April 2026 — the 2026/27 tax year.
What to keep
The figures above are only as good as what sits behind them. These are the records HMRC would ask for.
- Your last two years of accounts or Self Assessment returns, for a profit figure that is not a guess.
- A written quote for company accountancy, payroll and confirmation statement filing — the cost side of this decision is usually underestimated.
- Your household budget, for how much you actually need to draw.
- Any contracts with a single dominant client, for the IR35 question.
- Existing business assets and their written-down values, which transfer into the company at market value unless you elect otherwise.
The dates that matter
| When | What | If you miss it |
|---|---|---|
| Any time | Incorporate. There is no window — but the accounting periods either side are cleaner if you start on a sensible date. | Nothing, though a mid-year switch means two sets of figures for one tax year. |
| Within 3 months of starting to trade | Register the company for corporation tax. | A penalty for failure to notify, and HMRC estimating the position for you. |
| By 5 October after the tax year you stop trading as a sole trader | Tell HMRC the sole trade has ceased. | Class 2 NI keeps being charged and payments on account keep being demanded for a trade that no longer exists. |
| 9 months and 1 day after the company year end | Pay corporation tax. | Interest from that date. The return is due three months later. |
| Annually | File accounts and a confirmation statement at Companies House. | Late filing penalties from £150, doubling for repeat lateness, and eventually strike-off. |
How to actually do it
Model both structures on the same profit
Sole trader: income tax and Class 4 NI on the whole profit. Company: corporation tax, then income tax on what you take out. Compare what you end up with, not the headline rates.
Price the company properly
Accountancy, payroll, a business bank account, and your own time on the extra admin. This is the number that most often turns a saving into a loss.
Check IR35 if you have one main client
HMRC's CEST tool gives an indicative answer and a printable result. For medium and large clients the determination is theirs to make and to give you.
Incorporate and register
Form the company, open a business account, register for corporation tax within three months of trading, and register as an employer if you will run payroll.
Transfer the trade cleanly
Assets pass at market value unless you make a joint election. Tell HMRC the sole trade has ceased, and deal with any overlap relief on the final return.
www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca29020
Worked examples
Three situations, worked through. They use the same rules as the tool above, so you can check the arithmetic against a case near your own.
£35,000 profit, needs all of it
- Sole trader tax and NI
- About £6,500
- Company total tax
- About £6,200
- Extra cost of the company
- £1,200 or more
- Net position
- Worse by roughly £900
The saving exists but the costs are larger. At this level the company is worth considering for liability or credibility reasons, not for tax.
£70,000 profit, needs £40,000
- Sole trader tax and NI
- About £19,500
- Company: CT plus personal tax on £40,000 drawn
- About £14,800
- Retained in the company
- About £15,000
- Net position
- Better, by a clear margin
The classic case for incorporating. The advantage comes from the profit you leave in, not from the profit you take out.
£70,000 profit, needs all of it
- Sole trader tax and NI
- About £19,500
- Company total tax on full extraction
- About £19,000
- Extra cost of the company
- £1,500
- Net position
- Roughly a wash
Same profit, opposite answer. Whether you need the cash matters more than how much profit there is.
The rules behind this
Every figure above comes from one of these. Where we have interpreted rather than calculated, the tool says so.
Sole trader profits are charged to income tax at 20/40/45% and Class 4 NI at 6% and 2%.
Company profits are charged to corporation tax at 19% up to £50,000 and 25% above £250,000, with marginal relief between.
Extracting profit from a company is a second taxable event: dividends or salary.
A company must file accounts at Companies House and they are public.
Where an intermediary is used and the engagement would otherwise be employment, the off-payroll rules apply.
Questions people ask
At what profit does a company start to win?
There is no single figure, because it depends on how much you draw. Taking everything out, the two are close at any profit. Leaving profit in or routing it to a pension, a company usually pulls ahead somewhere around £40,000–£50,000 of profit once running costs are counted.
Can I go back to being a sole trader?
Yes, but it is not free. Winding up the company means dealing with the remaining reserves, and taking them as capital rather than dividends needs a formal process. Reversing is more expensive than not incorporating.
Does a company protect me from liability?
Generally yes — that is what limited liability means — but lenders and landlords routinely ask directors for personal guarantees, and a director can still be personally liable for their own negligence. It is a real benefit, weaker in practice than in theory.
What happens to my existing business assets?
They transfer to the company at market value, which can crystallise a balancing charge on assets you have claimed capital allowances on. A joint election can transfer them at written-down value instead, which is usually what you want.
Will I pay National Insurance either way?
As a sole trader, Class 4 on profits and Class 2 if profits exceed the small profits threshold. Through a company, only on salary — dividends carry no NI at all, which is a large part of where the difference comes from.
Software that files it for you
Partner linksIf you keep your own books, these are the packages that handle Self Assessment and Making Tax Digital.
FreeAgent
Free optionMTD ready
The freelancer and contractor favourite, free with some bank accounts.
- Free forever with a NatWest, Royal Bank of Scotland, Ulster or Mettle business account
- Built-in Self Assessment and MTD for Income Tax filing
From £0 with a NatWest, RBS or Mettle account, otherwise about £19/mo
See FreeAgentQuickBooks
MTD ready
The big all-rounder with the deepest MTD track record.
- Sole Trader plan built specifically for Self Assessment and MTD
- Snap and store receipts, automatic bank feeds
From about £10/mo, frequent 90% off intro offers
See QuickBooksXero
MTD ready
The scale-up choice once you have staff, stock or VAT.
- Huge app marketplace and the accountant industry standard
- Strong for VAT, payroll and multi-user limited companies
From about £15/mo
See XeroWe may earn a commission if you sign up through one of these links. It never changes what we calculate, what we recommend, or the order they appear in.