Business structure guide
Sole Trader vs Limited Company in 2026: VAT, Tax and National Insurance Compared
For the 2026/27 tax year, if you plan to take all of your profit out of the business, running it through a limited company usually costs more tax than trading as a sole trader. On our figures the gap is between about £1,000 and £2,300 a year for profits of £30,000 to £120,000, before accountancy fees. A company tends to pay off only when you leave profit in the business, pay into a pension through it, or have staff. VAT works almost the same way for both.
Key facts for 2026/27
- Tax year
- 6 April 2026 to 5 April 2027
- Personal allowance
- £12,570, frozen until April 2031
- Sole trader NICs
- Class 4 at 6% on profits from £12,570 to £50,270, then 2%
- Dividend tax
- 10.75%, 35.75% and 39.35%, after a £500 allowance. The first two rose by 2 points in April 2026
- Corporation tax
- 19% up to £50,000 of profit, 25% above £250,000, with marginal relief in between
- Employer NICs
- 15% on salary above £5,000
- Employment Allowance
- £10,500, but not for a company whose only paid employee is its sole director
- VAT threshold
- £90,000 for both. A sole trader adds up all their businesses; a company is counted on its own
The two structures side by side
| Sole trader | Limited company | |
|---|---|---|
| Legal status | You and the business are the same person | The company is a separate legal person that you own and run |
| Liability | Unlimited: your personal assets are at risk for business debts | Usually limited to what you put in, unless you give personal guarantees |
| Tax on profits | Income tax at 20%, 40% and 45% on all profit, whether you take it or not | Corporation tax at 19% to 25%, then personal tax on what you take out |
| National Insurance | Class 4 at 6% and 2% | Employer 15% and employee 8% on salary above the thresholds; none on dividends |
| Taking money out | Any time, no extra tax | Salary, dividends or pension contributions, each taxed differently |
| VAT | One registration covers all your trades | The company registers in its own name |
| Making Tax Digital for Income Tax | Applies above £50,000 of income now, £30,000 from April 2027 and £20,000 from April 2028 | Does not apply to the company |
| Paperwork | Self Assessment return once a year | Annual accounts, confirmation statement, corporation tax return, payroll and your own Self Assessment |
| Public record | Nothing published | Directors, shareholders and accounts are on Companies House |
| Set up cost | Free to register with HMRC | £100 to incorporate online, £50 a year for the confirmation statement |
How much tax each one costs
These figures assume England, Wales or Northern Ireland rates for 2026/27, no other income, and that all profit is paid out to you in the same year. The company examples have one director, no other staff, and pay a salary of £12,570 with the rest as dividends. They ignore accountancy fees, which are usually higher for a company.
| Profit before paying yourself | £30,000 | £50,000 | £80,000 | £120,000 |
|---|---|---|---|---|
| Sole trader: tax and NICs | £4,532 | £9,732 | £22,289 | £43,089 |
| Sole trader: you keep | £25,468 | £40,268 | £57,711 | £76,911 |
| Company: tax and NICs | £5,597 | £11,138 | £24,235 | £45,346 |
| Company: you keep | £24,403 | £38,862 | £55,765 | £74,654 |
| Extra cost of the company | £1,065 | £1,406 | £1,947 | £2,257 |
Tax and NICs a year, all profit paid out
Under each profit level is the company’s extra cost. 2026/27 rates, one director on a £12,570 salary.
- Sole trader
- Limited company
Our calculations using income tax, dividend tax, corporation tax and National Insurance rates for 2026/27.
The company figures include employer NICs on the salary, corporation tax on what is left, and dividend tax on the payout. At £80,000 and £120,000 the company falls inside the marginal relief band, where corporation tax works out at about 26.5% on each extra pound.
Compare your own figures
Sole trader or limited company?
2026/27 tax on your own profit. Results update as you type.
Up to £250,000
Not paid out this year
| Result | Sole trader | Limited company |
|---|---|---|
| Income tax | £7,486 | £3,107 |
| National Insurance | £2,246 | £1,136 |
| Corporation tax | none | £6,896 |
| Total tax now | £9,732 | £11,138 |
| You take home this year | £40,268 | £38,862 |
| Left in the company | none | £0 |
Trading as a sole trader leaves you about £1,406 better off this year, before the company’s extra accountancy and filing costs.
England, Wales and Northern Ireland rates for 2026/27. No other income, no Employment Allowance, no pension contributions, no student loan. An estimate, not tax advice.
Why the company has lost its tax edge
For years, paying yourself a small salary and the rest in dividends was the standard way to save tax. Four changes have eaten into that:
- Corporation tax went up. Since April 2023 the rate has been 25% on profits over £250,000, with marginal relief that pushes the effective rate on profits between £50,000 and £250,000 to 26.5%.
- Dividend tax went up again. From April 2026 the ordinary rate is 10.75% and the upper rate 35.75%, both 2 points higher than last year. The tax free dividend allowance is now only £500.
- Sole trader NICs went down. Class 4 was cut from 9% to 6%, and compulsory Class 2 was scrapped in April 2024.
- Employer NICs went up. Since April 2025 employers pay 15% on salary above £5,000. A one person company cannot claim the £10,500 Employment Allowance to offset it.
When a limited company can still make sense
- You do not need all the profit. A sole trader pays income tax on all profit whether they take it or not. A company pays corporation tax at 19% on its first £50,000 of profit, and you only pay personal tax when you take money out. Enter an amount in “Profit to leave in the company” above to see the effect. At £80,000 of profit, taking a £12,570 salary plus dividends up to the basic rate limit leaves about £14,800 in the company and cuts this year’s tax to around £18,950, against £22,289 as a sole trader. That retained money is taxed as dividends when you eventually draw it.
- You want to pay into a pension. Employer pension contributions from the company are normally deductible for corporation tax and carry no NICs, within the £60,000 annual allowance.
- Your income is around £100,000 to £125,140. Between those points a sole trader loses the personal allowance, which works out at an effective 60% rate. A company lets you keep your personal income below £100,000 by leaving the rest in the business.
- You need limited liability. If a contract, a lease or a claim could exceed what the business is worth, a company protects your personal assets. Banks and landlords often ask small company directors for personal guarantees, which cancel that out.
- Clients insist on it. Some larger businesses and agencies only contract with limited companies. If you work through an agency, check the off payroll working rules (IR35), which can mean being taxed much like an employee.
- You plan to sell. Selling shares in a trading company can qualify for Business Asset Disposal Relief, now at 18% capital gains tax on up to £1 million of lifetime gains.
Salary for a one person company: £12,570 or £5,000?
Most one person companies pay the director a salary of £12,570. It sits exactly at the personal allowance and the employee NIC threshold, so you pay no income tax or employee NICs on it, and it earns a qualifying year for your State Pension.
The company does pay employer NICs of 15% on the £7,570 above £5,000, which is £1,135.50. But that cost, and the salary itself, reduce the company’s profit for corporation tax. The tax saved is bigger than the NICs paid, so £12,570 beats £5,000 by about £463 a year when the company pays 19% corporation tax, and by about £753 when it is in the marginal relief band. Choosing £5,000 also means the salary is below the £6,708 lower earnings limit, so it would not count towards your State Pension on its own.
How VAT works for each
The VAT rules are the same either way: you must register once taxable turnover goes over £90,000 in any rolling 12 months, or if you expect to go over it in the next 30 days alone. Our VAT threshold tracker shows where you stand. The differences are in whose turnover counts.
- A sole trader is registered as a person. HMRC registers you, not your business, so if you run a café and do freelance photography on the side, both count towards one £90,000 total and one VAT registration covers both.
- A company is a separate person. It has its own threshold and its own VAT number. Splitting one real business into several companies to keep each under £90,000 does not work: HMRC can treat them as one and register them together.
- Switching needs a VAT decision. When you move a VAT registered sole trade into a new company, the company either registers afresh or takes over your existing VAT number using form VAT68. Moving the business as a going concern usually means no VAT is charged on the transfer itself.
- Watch the Flat Rate Scheme. Consultants and contractors who buy very few goods usually fall into the 16.5% limited cost rate, which makes the scheme poor value. Check with our flat rate VAT calculator.
Our full guide to VAT for sole traders and freelancers covers voluntary registration and which scheme to choose.
Making Tax Digital
This is now a real difference. Since 6 April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and send HMRC quarterly updates. The limit falls to £30,000 from April 2027 and £20,000 from April 2028. Limited companies are not covered by Making Tax Digital for Income Tax, though any VAT registered business, sole trader or company, already has to follow Making Tax Digital for VAT. Our Making Tax Digital for Income Tax guide has the details.
- From 6 April 2026Over £50,000qualifying income: digital records and quarterly updates
- From April 2027Over £30,000more sole traders and landlords join
- From April 2028Over £20,000the lowest limit announced so far
Running costs and deadlines
| Task | Sole trader | Limited company |
|---|---|---|
| Register | With HMRC for Self Assessment by 5 October after your first tax year | At Companies House: £100 online. Every director must now verify their identity |
| Annual filing fee | None | Confirmation statement: £50 online |
| Accounts | Records for your tax return | Full accounts to Companies House within 9 months of the year end (21 months for the first) |
| Tax return | Self Assessment by 31 January | Company tax return within 12 months of the year end, plus your own Self Assessment |
| Paying tax | 31 January, plus payments on account on 31 January and 31 July | Corporation tax 9 months and 1 day after the year end |
| Late filing penalty | £100 for a late Self Assessment return (penalty points instead if you use Making Tax Digital for Income Tax) | £200 for a late company tax return (doubled from April 2026), plus Companies House penalties of £150 to £1,500 for late accounts |
| Payroll | Not needed for yourself | Needed to pay yourself a salary |
Borrowing from your company is expensive if you do not repay it in time. A director’s loan still outstanding nine months after the company’s year end triggers a temporary tax charge of 35.75% for loans made from 6 April 2026, repaid by HMRC only when you pay the loan back.
What could change at the Budget
The Autumn Budget on 28 October 2026 is the next moment rates could move. The government has promised not to raise income tax, National Insurance or VAT rates, but that promise does not cover dividend tax. Some advisers have suggested closing the NIC gap between employees and the self employed. None of this is confirmed, and we will update this guide if anything changes.
If you switch from sole trader to company, note that incorporation relief on capital gains must now be claimed, from 6 April 2026; it no longer applies automatically.
Pricing a job or checking an invoice?
Add or remove VAT at 20%, 5% or any rate in seconds with the free VAT calculator.
Frequently asked questions
Is a limited company more tax efficient in 2026?
Not if you take out all the profit. On 2026/27 rates a one person company pays more tax than a sole trader at every profit level we tested between £30,000 and £120,000. It can come out ahead if you leave profit in the company or use company pension contributions.
At what profit is it worth going limited?
There is no longer a simple break even point if you draw everything. The decision depends on how much you can leave in the business, your need for limited liability and what your clients expect.
Do limited companies pay VAT differently?
No. The rates, the £90,000 threshold and the returns are the same. The company registers in its own name, while a sole trader’s registration covers everything they do.
Do I pay National Insurance on dividends?
No. Dividends carry income tax but no NICs, which is the main reason directors take most of their income that way.
What if I live in Scotland?
Salary and sole trader profits are taxed at Scottish rates, which are higher from about £29,500. Dividends are taxed at the UK rates, so a company can compare slightly better for Scottish taxpayers. Our calculator uses rates for the rest of the UK.
Can I change from sole trader to limited company later?
Yes, many people start as sole traders and incorporate later. Plan the VAT registration, contracts, bank account and any capital gains relief at the same time.
Once you are trading, our invoice VAT calculator builds VAT invoices with mixed rates, and our VAT registration statistics show how many businesses of each type are registered.
Sources: GOV.UK income tax rates; self employed National Insurance rates; rates and thresholds for employers 2026 to 2027; corporation tax rates; tax on dividends; threshold freeze to April 2031; Companies House fees; Making Tax Digital for Income Tax; corporation tax late filing penalties. This page is general information, not tax advice.