Sole trader vs limited company in 2026: which saves you more tax?
Every self-employed person in the UK eventually asks the same question: should I go limited? The answer is not as simple as your mate at the pub made it sound.
"Just go limited, you'll save thousands in tax." That advice gets thrown around constantly. And at certain income levels, it is true. But at others, incorporating will cost you more in accountant fees, admin time, and Corporation Tax than you save. This guide gives you the real numbers so you can make a decision based on maths, not folklore.
Quick answer
For most UK tradespeople, incorporating as a limited company starts saving meaningful tax when your profits consistently exceed £40,000-£50,000 per year. Below £30,000, the admin costs and accountancy fees of running a limited company typically wipe out any tax savings. The sweet spot depends on your specific circumstances, but the numbers below give you a solid framework.
How sole traders are taxed in 2025/26
As a sole trader, your business profits are treated as personal income. HMRC does not distinguish between "business money" and "your money" - it is all the same pot. You pay:
- Income tax on profits above your personal allowance (£12,570)
- Class 2 National Insurance at £3.45 per week if profits exceed £12,570
- Class 4 National Insurance at 6% on profits between £12,570 and £50,270, then 2% above that
The simplicity is the main advantage. One tax return per year. No separate business accounts legally required (though you should have one). No Companies House filings. No director's responsibilities.
How limited companies are taxed
A limited company is a separate legal entity. It pays Corporation Tax on its profits, and then you extract money from the company via a salary and dividends. The tax efficiency comes from this two-step process.
Corporation Tax rates for 2025/26:
| Profit level | Rate |
|---|---|
| Up to £50,000 | 19% |
| £50,001 to £250,000 | 26.5% (marginal rate) |
| Over £250,000 | 25% |
The standard strategy is to pay yourself a small salary (just below the NI threshold) and take the rest as dividends. Dividend tax rates from April 2026:
| Band | Rate (from April 2026) |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.25% |
| Additional rate | 40.38% |
The dividend allowance is now just £500 per year. Everything above that is taxed.
The optimal director's salary
Most accountants recommend a director's salary of £9,100 per year for 2025/26. Why this specific number? It is just below the National Insurance Primary Threshold, so you pay zero employee NI. The company pays zero employer NI. And the salary is still a deductible expense for Corporation Tax purposes. You also preserve your state pension qualifying year because it is above the Lower Earnings Limit.
Real tax comparison at different profit levels
Here is what actually matters. The following calculations assume: sole trader claims no special reliefs beyond the personal allowance; limited company director takes £9,100 salary and the rest as dividends; limited company pays £1,500/year in additional accountancy and admin costs.
| Annual profit | Sole trader total tax | Ltd company total tax | Ltd saving (after costs) |
|---|---|---|---|
| £25,000 | ~£3,230 | ~£3,080 + £1,500 costs | -£1,350 (costs more) |
| £35,000 | ~£5,830 | ~£4,900 + £1,500 costs | -£570 (costs more) |
| £45,000 | ~£8,530 | ~£7,100 + £1,500 costs | -£70 (roughly equal) |
| £55,000 | ~£12,030 | ~£9,600 + £1,500 costs | +£930 |
| £70,000 | ~£17,530 | ~£13,200 + £1,500 costs | +£2,830 |
| £85,000 | ~£22,500 | ~£15,500 + £1,500 costs | +£5,500 |
| £100,000 | ~£27,430 | ~£18,500 + £1,500 costs | +£7,430 |
The crossover point is around £45,000-£50,000 in annual profit. Below that, the accountancy fees and admin burden of a limited company eat up any tax advantage. Above it, the savings compound fast.
At £85,000 profit, you are saving roughly £5,500 per year by operating through a limited company. That is a holiday. Or a new van deposit. Or just money that stays in your pocket instead of going to the treasury.
The hidden costs nobody mentions
Tax savings are only one side of the equation. Here is what going limited actually costs in practice:
Accountancy fees. A sole trader can get away with a basic accountant for £300-£500 per year, or do their own return. A limited company needs proper accounts filed with Companies House and HMRC, payroll for your salary, dividend paperwork, and Corporation Tax returns. Budget £1,000-£2,000 per year minimum. In London, more like £2,000-£3,500.
Admin time. You will spend more time on paperwork. Monthly payroll submissions (RTI), quarterly VAT returns if registered, annual accounts, confirmation statements to Companies House, maintaining a registered office, keeping statutory books. If your time is worth £50 an hour, the extra 2-3 hours per month is a real cost.
Banking. Business bank accounts for limited companies sometimes carry monthly fees. Starling and Tide are free, but the big banks charge £5-£15 per month. Minor, but it adds up.
IR35. If most of your income comes from one or two clients, HMRC may argue that you are a disguised employee. This is less of an issue for tradespeople with multiple domestic customers, but if you do subcontracting work for a single main contractor, IR35 is a real risk that can eliminate all the tax benefits of being limited.
Money is not yours. In a limited company, the money in the business bank account belongs to the company, not you. You cannot just move it to your personal account whenever you like - it needs to be extracted as salary, dividends, or a director's loan, each with tax implications.
Advantages of a limited company beyond tax
Limited liability. This is the original point of a limited company. If the business goes under, your personal assets (house, car, savings) are protected. As a sole trader, your personal and business liabilities are the same thing. If you are doing work where a mistake could result in a big claim - structural work, gas installations, electrical work - limited liability is worth considering regardless of the tax position.
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Professional image. Some commercial clients and main contractors will only work with limited companies. Having "Ltd" after your name can open doors, particularly for larger contracts.
Pension contributions. Your company can make employer pension contributions that are tax-deductible for Corporation Tax. This is one of the most tax-efficient ways to extract money from a limited company, especially at higher income levels.
Income smoothing. In a good year, you can leave profits in the company and only draw what you need. This avoids pushing yourself into a higher tax bracket. Sole traders pay tax on all profits in the year they are earned, regardless of whether they spend the money.
When should you actually incorporate?
Based on the numbers and the hidden costs, here is a practical framework:
- Under £30,000 profit: Stay sole trader. The admin costs destroy any tax saving.
- £30,000-£50,000 profit: It depends. If your income is stable and growing, start talking to an accountant about timing. If it fluctuates, the certainty of sole trader simplicity is worth the small tax premium.
- Over £50,000 profit consistently: Incorporate. The tax savings are real and meaningful at this level. Every year you delay costs you money.
- Over £85,000 profit: You should have incorporated yesterday. At this level you are potentially overpaying by £5,000+ per year.
The key word is "consistently." One good year at £55,000 followed by £30,000 does not justify the ongoing costs of a limited company. You need sustained profitability above the crossover point.
CIS and the construction industry
If you work in construction, the Construction Industry Scheme (CIS) adds another layer. Under CIS, contractors deduct tax at source from subcontractor payments - 20% if you are registered, 30% if you are not. This applies whether you are a sole trader or limited company.
The main difference: as a sole trader, CIS deductions are offset against your income tax and NI bill. As a limited company, they are offset against your Corporation Tax, PAYE, and NI liabilities. The mechanics change but the net effect is similar. Use our CIS calculator to work out your deductions.
One practical advantage of being limited under CIS: the 20% deduction at source feels less punishing when your Corporation Tax rate is 19% anyway. The maths nearly cancel out, so your cash flow is less disrupted.
Frequently asked questions
Can I switch from sole trader to limited company mid-year?
Yes. You can incorporate at any point during the tax year. Your sole trader business ceases on the incorporation date, and you file a shorter Self Assessment return for the period up to that date. The limited company then files its own accounts from the incorporation date. Most accountants recommend incorporating at the start of a tax year (6 April) for cleaner accounting, but it is not required.
Do I still need to file Self Assessment as a limited company director?
Yes. If you receive dividends from your company, you must file a personal Self Assessment return to declare them. You will also declare your director's salary. Going limited does not get you out of Self Assessment - it actually adds a Corporate Tax return on top.
What about the flat rate VAT scheme?
The flat rate scheme is available to both sole traders and limited companies with VAT-taxable turnover of £150,000 or less. It used to offer significant savings for labour-only trades (the "limited cost trader" rate is 16.5%), but for most tradespeople who buy materials, the standard scheme works out better. This decision is separate from the sole trader vs limited question. Check rates using our VAT calculator.
How much does it cost to set up a limited company?
Companies House charges £12 for online incorporation, and it takes about 24 hours. You will also need a business bank account (free with Starling or Tide), and an accountant familiar with small company accounts (£1,000-£2,000/year). Total first-year setup cost including accountancy: around £1,200-£2,200.
The sole trader vs limited company decision is fundamentally a maths problem. Run the numbers for your specific situation, factor in the admin costs, and make the switch when the savings consistently outweigh the hassle. Track your income and expenses properly from day one with InvoiceAdept, and you will have the data you need to make the right call at the right time. For current thresholds, check HMRC's rates and thresholds page.
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