Sole trader vs limited company: which pays less tax in 2025/26?

The question comes up constantly for any UK SME owner growing past £30,000 in profit: should I incorporate? The answer depends entirely on your profit level, how much you need to draw out, and what you factor in for the accountancy overhead a company brings. This article works through the numbers at three representative profit levels using 2025/26 rates.

How sole trader tax works in 2025/26

As a sole trader, your profit is personal income. You pay income tax on it at 20%, 40%, or 45% depending on the band, after your personal allowance of £12,570. On top of income tax, you pay National Insurance: Class 4 at 6% on profits between £12,570 and £50,270, and 2% above that. Class 2 NI (£3.45 per week) is due once profits exceed £12,570.

Band	Income range	Income tax rate
Personal allowance	Up to £12,570	0%
Basic rate	£12,571 – £50,270	20%
Higher rate	£50,271 – £125,140	40%
Additional rate	Above £125,140	45%

How limited company tax works in 2025/26

A limited company pays corporation tax on its profits. The small profits rate is 19% on profits up to £50,000. The main rate is 25% above £250,000. Between £50,000 and £250,000 marginal relief applies, tapering between the two rates.

After corporation tax, the remaining profit belongs to the company. A director-shareholder extracts it as a combination of salary and dividends. The optimal director salary for 2025/26 is typically £12,570 — equal to the personal allowance. At this level no income tax is payable and no employee or employer National Insurance is triggered (assuming no Employment Allowance is claimed). Everything above the salary is paid as dividends.

Dividends are taxed at lower rates than salary: 8.75% within the basic rate band, 33.75% in the higher rate band, and 39.35% at additional rate. The first £500 of dividends each year is covered by the dividend allowance and taxed at 0%.

The numbers at three profit levels

The following comparison uses a single director-shareholder, optimal salary of £12,570, and assumes £1,500 annual accountancy cost as a deductible company expense for the limited company scenario.

At £30,000 profit

At £30,000 profit, sole trader keeps £977 more per year. The accountancy overhead of running a limited company (£1,500 in this example, already deducted as a company expense) more than wipes out any tax advantage. Incorporating at this profit level rarely makes financial sense.

At £60,000 profit

At £60,000, limited company saves £623 per year net of accountancy costs. The gap is real but modest. At this level the decision often comes down to factors beyond tax: liability protection, ability to retain profits in the company for future investment, or perception with larger clients.

At £100,000 profit

At £100,000 the picture flips. Sole trader is £3,116 better off per year. This surprises many people. The reason: once dividends push you into the higher rate band at 33.75%, the combined burden of corporation tax plus higher-rate dividend tax exceeds the sole trader income tax rate. The crossover point shifts depending on how much you need to draw versus retain in the company.

The £100,000 personal allowance trap

Both sole traders and company directors face a painful effective marginal rate between £100,000 and £125,140. The personal allowance tapers by £1 for every £2 earned above £100,000, creating a 60% effective marginal tax rate on income in that band. For sole traders this is pure income tax. For directors it applies to the combination of salary and dividends.

The most common mitigation is pension contributions. A sole trader paying £10,000 into a personal pension when their income is between £100,000 and £110,000 can restore £5,000 of their personal allowance and save approximately £4,000 in income tax plus NI. A limited company paying employer pension contributions achieves a similar result while reducing corporation tax simultaneously.

Factors beyond the tax comparison

Tax efficiency is one variable. These factors matter equally in the decision:

• Accountancy cost: A properly run limited company typically adds £1,000–2,500 per year in additional accountancy fees. Below £40,000–50,000 profit this routinely exceeds the tax saving.
• Administrative burden: Companies must file annual accounts at Companies House, submit a Confirmation Statement, maintain statutory registers, and observe director duties. This is material time and cost.
• Liability protection: A limited company separates personal assets from business liabilities. For businesses with client contracts, product liability, or significant credit exposure this is often worth more than any tax saving.
• Credibility: Some enterprise clients and public sector contracts require a limited company structure regardless of size.
• Exit planning: Selling a limited company may allow you to use Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), capping CGT at 10% on qualifying gains up to £1m. A sole trader sells a business, which is taxed differently.

Self Assessment payment timing for sole traders

Sole traders pay via Self Assessment with two payment dates: 31 January (balancing payment for last year, plus first payment on account for next year) and 31 July (second payment on account). Together these can add up to 150% of one year’s tax bill landing in a single January. The monthly set-aside figure in the calculator smooths this across 12 months so it never comes as a shock.

Run your own numbers

The comparisons above use specific assumptions. Your position may differ based on pension contributions, other income sources, your actual draw versus retention, and your accountancy costs. The 3DMAI Income Tax Calculator lets you run the comparison for your exact profit level in under a minute.