The short answer
In 2025/26, sole trader is usually better below £40,000 profit because the limited-company setup costs (accountancy, filing, payroll) outweigh the small tax saving. Limited company is usually better above £50,000 profit — but by a tighter margin than most online calculators suggest, thanks to 2023's corporation tax increases and the reduction of the dividend allowance to £500.
Between £40,000 and £50,000 is a genuinely mixed zone: near-breakeven on pure tax, so the decision hinges on factors beyond the tax bill — liability protection, pension planning flexibility, perception by larger clients, and your tolerance for admin.
How each structure is taxed
Sole trader
You pay income tax and Class 4 NI on your profit after allowable expenses. That's it — one tax return (Self Assessment), paid by 31 January following the end of the tax year. Class 2 NI was abolished from April 2024.
- Income tax: 20% on profit from £12,570–£50,270, 40% to £125,140, 45% above.
- Class 4 NI: 6% from £12,570–£50,270, 2% above.
Limited company
Your company pays corporation tax on profit, then you pay personal tax on whatever you extract (salary or dividends). Two layers, two sets of returns.
- Corporation tax: 19% up to £50k profit, 26.5% effective from £50k–£250k, 25% above.
- Director salary: usually £12,570 — uses the full personal allowance with minimal employer NI.
- Dividend tax: 8.75% / 33.75% / 39.35% on dividends above the £500 allowance, stacked on your salary to determine rate band.
At £80,000 turnover with £3,000 expenses, a sole trader nets about £53,800 after tax. A limited company director (£12,570 salary plus dividends) nets about £54,200 — a tiny £400/year edge that's easily wiped out by accountancy fees. Above £120,000 turnover the limited company advantage grows, but so does the admin.— GoForma technical team, 2025/26 tax year modelling
The factors that aren't about tax
- Liability protection — a limited company shields your personal assets from business debts. Sole traders are personally liable for everything.
- Credibility and client policies — many larger clients, public-sector bodies and recruitment agencies only contract with limited companies.
- Pension flexibility — limited company employer pension contributions reduce both corporation tax AND NI, making them materially more efficient than sole trader personal contributions.
- Income deferral — limited companies can retain profits in the company and pay dividends in a later, lower-tax year. Sole traders are taxed on all profit in the year earned.
- Setup and exit cost — limited companies cost £50 to set up, £34/year for the Confirmation Statement, and ~£1,500–£3,000 to wind down via MVL if you want the remaining assets out at CGT rates.
Switching from sole trader to limited company
Incorporating an existing sole-trader business is a one-day exercise: register the company at Companies House (£50), transfer trade and assets to the new company, close the sole-trader with HMRC, and start Running Payroll for your director salary. Incorporation relief usually defers any capital gains tax on the transfer of goodwill.
Going the other way (winding down a limited company and returning to sole trader) is more involved. For accumulated profits under £25,000, an informal strike-off works; above that, a Members' Voluntary Liquidation (MVL) is usually the most tax-efficient route — Business Asset Disposal Relief (formerly Entrepreneurs' Relief) can apply at 14% CGT for 2025/26.