Sole trader or limited company? See which keeps you more

How the calculator compares the two routes

The tool above takes one number: your annual profit before tax. It runs that figure through both structures using full 2026/27 rates. On the sole trader side it deducts Income Tax, using Scottish bands if you select Scotland. It also deducts Class 4 National Insurance. That is 6% on profits between £12,570 and £50,270, then 2% above.

On the company side it models the standard extraction strategy:

• The director takes a salary. The default is £12,570, which uses the Personal Allowance exactly and stays under the employee NI threshold.
• The company pays employer's National Insurance at 15% on salary above £5,000.
• Corporation Tax is charged on what is left.
• The remaining profit is paid out as dividends. These are taxed at 10.75%, 35.75% or 39.35% after the £500 dividend allowance.

Corporation Tax itself is not one rate:

• Profits up to £50,000 pay the small profits rate of 19%.
• Profits above £250,000 pay the main rate of 25%.
• Between the two, marginal relief produces an effective 26.5% rate on each extra pound.

The calculator handles that automatically. It also includes the Employment Allowance toggle for companies that qualify to reduce their employer NI bill.

Worked example: £60,000 profit, everything taken out

Here is the full comparison at £60,000 of profit for a director in England. They take the standard £12,570 salary. All remaining profit is extracted as dividends in the same year, with no Employment Allowance.

The difference is about £20 for the whole year, in the sole trader's favour. That is before you have paid a single accountancy invoice. The result surprises people who incorporated years ago, when the gap was worth thousands. It is also the single most useful thing this calculator shows. On a full-extraction basis at 2026/27 rates, the tax case for a company has largely gone at typical profit levels. Slide the profit figure up and down in the tool. You will see the two lines track each other remarkably closely.

Where a company still genuinely wins

The comparison above assumes you take every pound out in the year you earn it. Change that assumption and the company pulls ahead in specific, predictable situations.

• You leave profit in the business. Retained profit suffers only Corporation Tax, at 19% up to £50,000. A sole trader pays up to 42% (Income Tax plus Class 4) on the same money. That applies whether they spend it or not. If you are saving to invest, hire, or smooth out lumpy income, retention is a real advantage.
• You fund a pension through the company. Employer contributions are deductible for Corporation Tax. They carry no NI at all, and they do not count as your income. A company owner can move money into a pension more efficiently than almost any other extraction route. The £60,000 annual allowance still applies.
• You want limited liability. If the business fails or is sued, a company structure normally protects your house and savings. For some trades that alone justifies the admin.
• Your income is volatile. A company lets you smooth dividends across years. In expensive years that keeps you under the £50,270 higher-rate threshold, or the £100,000 taper.

You can test the company-side numbers in more detail with the Corporation Tax calculator and the dividend tax calculator.

How marginal relief works between £50,000 and £250,000

The Corporation Tax bands confuse a lot of owners, so here is the mechanism. Profits up to £50,000 pay 19%. Profits of £250,000 or more pay 25% on everything. In between, the company pays 25% minus marginal relief of 3/200ths of the gap up to £250,000. Take £80,000 of profit as an example. 25% of £80,000 is £20,000. Relief is £2,550, which is 3/200 of the £170,000 gap. That leaves £17,450, an average rate of 21.8%.

The part that matters for decisions is the marginal rate. Every pound of profit between £50,000 and £250,000 costs the company 26.5p. That is higher than the main rate itself. If your company's profit sits just above £50,000, you can pull it back under the small profits rate. Employer pension contributions or bringing forward equipment purchases both work. Watch the associated-company rules too. They split these limits between companies under common control, so a second company halves both thresholds.

The costs the tax numbers do not show

Running a company adds real overhead:

• statutory accounts and a CT600 filing
• a confirmation statement
• payroll to run for the salary
• dividend paperwork
• a separate Self Assessment for you as director

Most owner-managed companies pay £1,500 to £2,500 a year for an accountant to handle it. At £60,000 of profit that fee is roughly a hundred times the tax difference in the table above. There is also less privacy. Your accounts and your name as director are public at Companies House. Sole traders face more admin too. Those with income over £50,000 are in scope for Making Tax Digital quarterly reporting from April 2026. That narrows the admin gap somewhat. See our Making Tax Digital guide for what that involves.

Common mistakes when making this decision

• Using pre-2023 rules of thumb. "Incorporate at £30,000" advice predates the 19% to 25% Corporation Tax rise. It also predates the £500 dividend allowance and 15% employer NI from a £5,000 threshold. Run current numbers, not folklore.
• Comparing tax but ignoring the accountant. Subtract realistic professional fees from any tax saving before deciding.
• Forgetting the second layer of tax. Company profit is taxed once at Corporation Tax and again when extracted as dividends. Quoting "19% instead of 40%" ignores the dividend tax on the way out.
• Ignoring IR35 if you contract. If your contracts would be caught by the off-payroll rules, the company route loses most of its flexibility.
• Choosing a structure for one unusual year. A one-off spike in profit rarely justifies incorporation. A sustained change might.

What to do next

Use the calculator above at your realistic profit for the next two or three years, not just this one. Note how much of the profit you actually need to live on. The tool may show the routes within a few hundred pounds of each other. If so, let liability, retention and pension plans decide, not tax. Check your sole trader position in detail with the self-employed tax calculator. Or model your personal position as an employee-style earner with the take-home pay calculator. Ready to act? The official routes are setting up as a sole trader and forming a limited company on GOV.UK. Spend an hour with an accountant before incorporating. Moving an existing business into a company has tax consequences of its own.

These figures are estimates for guidance only. Confirm rates and your own position on GOV.UK or with a qualified adviser before acting.