Sole trader vs limited company in 2026: which saves you more tax?
If you're self-employed in the UK, you'll likely ask yourself whether to go limited. It's not as straightforward as your mate down the pub might suggest.
"Just go limited, you'll save thousands in tax," they say. Sometimes true, but not always. At certain earnings, the costs of incorporation, including accountant fees and Corporation Tax, might outweigh savings. Here, you'll find the real figures to decide based on facts, not hearsay.
Quick answer
For most UK tradespeople, a limited company becomes tax-efficient when profits consistently hit £40,000-£50,000 yearly. Below £30,000, the extra admin and accountancy costs usually cancel out any tax benefits. Your situation might vary, but the figures below offer a useful guide.
How sole traders are taxed in 2025/26
As a sole trader, your business profits are your personal income. HMRC treats all earnings as one. 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 a key benefit. One tax return yearly. No need for separate business accounts by law (though advisable). No Companies House filings. No director duties.
How limited companies are taxed
A limited company is a separate entity. It pays Corporation Tax on profits, and you take money out as salary and dividends. This two-step process is where tax efficiency comes in.
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 usual approach is to take a small salary (just below the NI threshold) and 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. Anything above is taxed.
The optimal director's salary
Most accountants suggest a director's salary of £9,100 for 2025/26. Why? It stays below the National Insurance Primary Threshold, meaning no employee NI. The company avoids employer NI as well. Plus, the salary is a deductible expense for Corporation Tax, and it keeps your state pension qualifying year intact because it is above the Lower Earnings Limit.
Real tax comparison at different profit levels
Here's the crucial part. These 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 extra 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 tipping point is around £45,000-£50,000 in profit. Below that, the extra costs of a limited company negate any tax savings. Above it, the benefits grow quickly.
At £85,000 profit, you're saving about £5,500 annually by choosing a limited company. That's significant money that could be used for a holiday, a new van deposit, or simply staying in your account instead of going to the government.
The hidden costs nobody mentions
Tax savings are just one part of the story. Here's what going limited really costs:
Accountancy fees. A sole trader might get by with a basic accountant for £300-£500 annually, or handle their own return. A limited company requires proper accounts filed with Companies House and HMRC, payroll for your salary, dividend paperwork, and Corporation Tax returns. Budget £1,000-£2,000 annually at least. In London, expect £2,000-£3,500.
Admin time. 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 valued at £50 an hour, the extra 2-3 hours monthly is a real cost.
Banking. Business bank accounts for limited companies may have monthly fees. Starling and Tide are free, but big banks charge £5-£15 monthly. Small, but it adds up.
IR35. If most income comes from one or two clients, HMRC might claim you're a disguised employee. Less of an issue for tradespeople with multiple customers, but if subcontracting for a single main contractor, IR35 is a real risk that can nullify all tax benefits of being limited.
Money is not yours. In a limited company, the money in the business account belongs to the company, not you. It cannot be moved to your personal account at will - it must 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 main reason for a limited company. If the business fails, your personal assets (house, car, savings) are protected. As a sole trader, personal and business liabilities are the same. If your work involves risks, like structural work or installations, limited liability is worth considering regardless of tax benefits.
Invoice your customers in 30 seconds
InvoiceAdept helps UK tradespeople send professional invoices, track payments, and stay MTD-compliant — all from your phone.
Start for free — no card needed
Professional image. Some clients and contractors prefer working with limited companies. Having "Ltd" can open opportunities, especially 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 take 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 take what you need. This avoids moving into a higher tax bracket. Sole traders pay tax on all profits in the year they are earned, regardless of spending.
When should you actually incorporate?
Based on the figures and hidden costs, here's a practical guide:
- Under £30,000 profit: Stay sole trader. Admin costs negate any tax savings.
- £30,000-£50,000 profit: It varies. If income is stable and rising, consult an accountant about timing. If it fluctuates, the simplicity of being a sole trader is worth the small tax premium.
- Over £50,000 profit consistently: Incorporate. The tax savings are significant at this level. Delaying costs you money each year.
- Over £85,000 profit: You should have incorporated already. At this level, you could be overpaying by £5,000+ yearly.
Consistency is key. One good year at £55,000 followed by £30,000 doesn't justify the ongoing costs of a limited company. Sustained profitability above the tipping point is necessary.
CIS and the construction industry
In construction, the Construction Industry Scheme (CIS) adds complexity. Contractors deduct tax at source from subcontractor payments - 20% if registered, 30% if not. This applies whether you're a sole trader or limited company.
The main difference: as a sole trader, CIS deductions offset your income tax and NI bill. As a limited company, they offset against Corporation Tax, PAYE, and NI liabilities. The mechanics differ but the net effect is similar. Use our CIS calculator to work out your deductions.
A practical advantage of being limited under CIS: the 20% deduction at source feels less harsh when your Corporation Tax rate is 19% anyway. The maths nearly balance, so your cash flow is less impacted.
Frequently asked questions
Can I switch from sole trader to limited company mid-year?
Yes. You can incorporate anytime during the tax year. Your sole trader business ends on the incorporation date, and you file a shorter Self Assessment return for the period up to that date. The limited company files its own accounts from the incorporation date. Most accountants suggest incorporating at the start of a tax year (6 April) for simplicity, but it's not mandatory.
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 doesn't exempt you from Self Assessment - it adds a Corporate Tax return as well.
What about the flat rate VAT scheme?
The flat rate scheme is open to both sole traders and limited companies with VAT-taxable turnover of £150,000 or less. It used to offer big savings for labour-only trades (the "limited cost trader" rate is 16.5%), but for most tradespeople who buy materials, the standard scheme is 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'll 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 essentially a maths problem. Run the numbers for your situation, consider the admin costs, and switch when the savings consistently outweigh the hassle. Track your income and expenses properly from the start with InvoiceAdept, and you'll have the data needed to make the right call at the right time. For current thresholds, check HMRC's rates and thresholds page.
Stop chasing invoices. Get paid faster.
InvoiceAdept sends professional invoices in 30 seconds, with automatic payment reminders and one-click card payments. Built for UK tradespeople. Free to start, no card required.
Try InvoiceAdept free →Send your first invoice in under a minute · No credit card needed
Ready to get started?
InvoiceAdept helps UK tradespeople send invoices, track payments, and stay compliant — all from one place.
Start for freeNo credit card required