Planning for 2026/27 – Sole Trader vs Limited Company

In past years, the question of Sole Trader vs Limited Company as a structure for a business was fairly simple: when profits reached a certain level, being a Limited Company was often the simple answer.

However, recently, and especially for 2026/27, there are multiple factors to consider. Higher dividend tax rates, Corporation Tax and Employer's National Insurance Contributions mean that incorporating purely to save tax is no longer the obvious choice. Tax is now only one part of the decision.

Limited Company: tax for 2026/27

The biggest change for owner-managed companies is the increase in dividend tax. From 6 April 2026, the dividend tax rates are:

Corporation Tax is unchanged and is as follows:

Please note that these thresholds can be altered depending on the company’s circumstances, such as a change of accounting period length or having “associated companies”.

Employers also generally pay Employer's National Insurance at 15% on salary above the £5,000 Secondary Threshold.

The Employment Allowance can reduce an eligible Employer's National Insurance bill by up to £10,500 for the year. However, a company with only one director cannot claim the Employment Allowance if that director is its only employee liable for Employer's National Insurance.

Most owner-managed companies therefore use a combination of salary and dividends. Salaries are deductible for corporation tax, whereas dividends are distributions from post-tax profits and are not deductible for Corporation Tax. The company's profits are therefore subject to Corporation Tax, while dividends may then be subject to personal dividend tax when received by the shareholder. When comparing salary with dividends, both Employee and Employer National Insurance Contributions also need to be considered.

Sole Trader: tax for 2026/27

As a Sole Trader, you pay Income Tax and National Insurance on your taxable business profits.

For taxpayers in England, Wales and Northern Ireland, the standard Personal Allowance remains £12,570.

Income Tax is then charged as follows:

Your Personal Allowance also starts to reduce once your adjusted net income exceeds £100,000.

Sole trader: National Insurance for 2026/27

Class 4 National Insurance is generally:

If your profits are above the small profits threshold of £7,105, Class 2 National Insurance is treated as already paid.

Comparison

To compare the two business structures in an example, we will assume the following:

• The business owner works alone and does not share the business with another individual;
• the business owner has no other income;
• they are an England, Wales or Northern Ireland taxpayer; the full Personal Allowance is available;
• the company pays the director a salary of £12,570;
• the company cannot claim the Employment Allowance;
• all remaining company profits are distributed as dividends;
• there are no pension contributions or other tax-planning adjustments; and
• the figures represent profits before the director's salary and Employer's National Insurance.

Here is a comparison taking into account the points mentioned above. The Limited Company calculations include marginal relief where Corporation Tax profits are between £50,000 and £250,000.

NB: this is strictly based on the assumptions listed above.

Whilst this is only a guideline, nevertheless, these figures demonstrate an important point: a Limited Company is no longer automatically more tax-efficient than operating as a Sole Trader.

The Limited Company figures above assume that the company cannot claim the Employment Allowance. If the company qualifies for the Employment Allowance, its employer's National Insurance liability may be reduced, improving the Limited Company result. However, the overall comparison will still depend on the owner's circumstances and how much profit is extracted.

When can a Limited Company be more appealing for tax purposes?

The previous example assumes that you withdraw all (or virtually all) of the business’s available profits. If you don't need to do that, a Limited Company can become much more attractive.

For example, imagine your business makes £100,000 but you only need £50,000 personally. A Sole Trader is generally taxed on the full £100,000 business profit, regardless of how much cash they withdraw.

A Company is different. You can take the amount you need to pay yourself and leave the remaining post-tax profits within the company. You do not pay personal dividend tax on profits simply because the company has earned them. Dividend tax generally arises when a dividend is declared/paid to you. This ability to control when profits are extracted remains one of the biggest tax-planning advantages of a limited company.

Other considerations

Positives for a Sole Trader structure

Sole Trader businesses typically have a lot less admin work to do, as they do not have separate submissions to make to Companies House, for example. Accountancy costs also tend to be lower for Sole Traders than they are for Limited Companies.

There is also the fact that sole trader businesses are simpler in that the money in the business is yours, rather than belonging to the company. The Limited Company has to pay you, typically via salary or dividends; you cannot just assume everything is yours. You don't need to decide whether a payment should be salary, dividend or a director's loan.

Sole trader losses may, subject to the specific loss-relief rules and relevant conditions, be capable of being relieved against other income. Company losses are subject to separate Corporation Tax loss-relief rules. The precise treatment depends on the type of loss and the circumstances, so specific advice should be taken rather than assuming that losses can always be offset against any other income.

Positives for a Limited Company structure

As mentioned above, the company can retain profits instead of you having to be personally taxed on monies you don’t spend. This ability to plan your income is one of the main advantages. That can defer your personal tax liabilities.

You can also consider employer pension contributions for a director. Subject to the relevant rules, these can be a very tax-efficient way of extracting value from a company, as pension contributions can reduce profits for Corporation Tax purposes, without being added to your in-year income. There are restrictions on this, so the correct advice should always be sought.

A company is a separate legal entity and provides “Limited Liability”. This can provide valuable commercial protection (supplier debts, for example), although directors can still have personal liability in certain circumstances.

If you want to consider bringing in outside investment, being a limited company would almost be a requirement. Outside investors will normally want shares in a company rather than an interest in a sole trade. Tax-advantaged investment schemes such as SEIS and EIS also require a qualifying company structure.

A company may appear more established, providing a more official image. Some customers, suppliers and investors prefer dealing with a limited company. This isn't a tax saving, but it can still be commercially important.

Potentially sharing income with your spouse or partner is possible with the correct prior planning, which can present family tax-planning opportunities. For example, spouses or civil partners may each own shares and receive dividends. Therefore, if one spouse has unused basic-rate bands, this could reduce the family's overall tax bill. However, you cannot simply transfer shares to somebody because they pay less tax. The share rights, settlements legislation, company law and wider tax consequences need to be considered.

What if you want to sell the business?

Your exit strategy should also be considered when making the choice between a sole trader and limited company structure, as selling shares in a company can produce a very different tax result from selling the underlying business assets.

Business Asset Disposal Relief may also be relevant where the qualifying conditions are satisfied. From 6 April 2026, the Business Asset Disposal Relief rate is 18%.

Therefore, it is worth considering your eventual exit before choosing or changing your business structure.

Conclusion

You need to consider all of the above points and make a careful judgement about your requirements, both for the short and long term. If you make a modest profit and need to withdraw all of it to live on, operating as a sole trader may be simpler and can also be more tax-efficient. If you make more than you need personally, a limited company might be the way forward. Don't incorporate simply because you’ve heard that “limited companies pay less tax”, as it may simply not be true in your case.

Matthews Hanton would be happy to consult with you on this, or other tax-planning subjects.