Every freelancer, contractor and small business owner eventually hits the same fork in the road: should you carry on as a sole trader, or set up a limited company? The internet will tell you the company "saves tax," and at certain profit levels that is true. But the saving is smaller than people think, it arrives with strings attached, and below a certain income it disappears entirely once you count the cost of running the company. Here is the honest version, with the numbers worked through.
- A limited company can leave you with more take-home once profits comfortably clear the personal allowance.
- At £60,000 profit the difference in 2025/26 is roughly £700 a year — real, but modest.
- Accountancy fees of £1,000–£2,000 can wipe out that saving at lower profits.
- The decision is rarely just about tax — liability, admin, IR35 and pensions all matter.
How a sole trader is taxed
As a sole trader, you and the business are legally the same person. There is no corporation tax, no Companies House filing, and your profit is simply your income. You pay income tax and Class 4 National Insurance through Self Assessment.
For 2025/26 that means, on your profit:
- Income tax: 20% above the £12,570 personal allowance, then 40% above £50,270.
- Class 4 NI: 6% on profit between £12,570 and £50,270, then 2% above.
- Class 2 NI is now voluntary for most, though it still protects your State Pension record.
It is gloriously simple. The money is yours the moment it lands, and your admin is one tax return a year.
How a limited company is taxed
A company is a separate legal person. Its profit belongs to the company until you extract it, and it is taxed twice on the way to your pocket: once as corporation tax inside the company, then again as dividend tax when you pay yourself.
The classic tax-efficient owner-director takes a small salary up to the personal allowance — £12,570 — and draws the rest as dividends. The salary is a deductible expense that reduces corporation tax, while dividends escape National Insurance entirely and are taxed at lower headline rates (8.75% / 33.75% / 39.35%) after a £500 dividend allowance.
That structure is where the saving comes from. Let us run it.
The worked example: £60,000 profit
Take a business making £60,000 of profit before the owner pays themselves anything.
As a sole trader:
Income tax
20% on £37,700 plus 40% on the next £9,730 = £7,540 + £3,892 = £11,432.
Class 4 NI
6% on £37,700 plus 2% on £9,730 = £2,262 + £195 = £2,457.
Take-home
£60,000 − £11,432 − £2,457 = about £46,111.
As a limited company (salary £12,570 + dividends):
Employer NI on the salary
15% on the slice above £5,000 = about £1,136.
Corporation tax
company profit after salary and employer NI is about £46,295, taxed at 19% = about £8,796.
Dividends drawn
£46,295 − £8,796 = about £37,499.
Dividend tax
after the £500 allowance, about £36,999 taxed at 8.75% = about £3,237.
Take-home
£12,570 salary + £37,499 dividends − £3,237 = about £46,831.
So at £60,000 profit the limited company leaves you roughly £720 better off — before you have paid for the privilege of running it.
Why that saving is smaller than the headlines suggest
Two things have eaten into the company advantage in recent years. The dividend allowance has shrunk to just £500, so almost all your dividends are now taxable. And employer National Insurance rose to 15% from April 2025 with the threshold dropping to £5,000, which means even a modest director's salary now triggers a real NI bill. The structure still wins at £60,000, but by hundreds rather than thousands.
Accountancy fees can erase the saving A limited company realistically needs an accountant — annual accounts, a corporation tax return, a confirmation statement and payroll all have to be filed correctly. That is commonly £1,000–£2,000 a year. At £60,000 profit, the £720 tax saving does not cover it. The company only pulls clearly ahead once profits are high enough that the saving outgrows the fees.
You can run both scenarios at your own profit level with our sole trader vs limited calculator, and fine-tune the director's pay split with the salary vs dividend tool.
Where the crossover really sits
As a rough guide:
| Annual profit | Usually better |
|---|---|
| Under £30,000 | Sole trader (saving is tiny, admin not worth it) |
| £30,000–£50,000 | Roughly even — depends on fees and whether you draw it all |
| £50,000+ | Limited company starts to win clearly |
| £100,000+ | Limited company, with real planning value |
The company advantage grows with profit, and it grows further if you do not need to draw every penny — because you can leave money in the company after corporation tax and pay yourself in a later, lower-income year, smoothing your tax over time. A sole trader cannot do that; their profit is taxed the year it is earned whether they spend it or not.
It was never only about tax
If you fixate on the £720, you will make a bad decision. The things that often matter more:
- Limited liability — a company ring-fences your personal assets if the business fails or is sued. For a sole trader, the buck stops at your house.
- Credibility — some clients, particularly larger ones, will only contract with a limited company.
- Admin and privacy — company accounts and your director details are public at Companies House, and the filing burden is real.
- Pensions — employer pension contributions from a company are a corporation-tax-deductible way to extract profit that often beats both salary and dividends.
- IR35 — if you work like an employee through your own company for a single client, the off-payroll rules can strip out most of the tax benefit. Our IR35 guide covers when this bites.
So which should you choose?
If you are testing an idea, earning modestly, or value simplicity above all, stay a sole trader — incorporate later when the numbers justify it, which is a routine thing to do. If your profits comfortably clear £50,000, you want limited liability, or you do not need to draw all your income each year, the company probably wins — just go in with your eyes open about the admin and fees.
Frequently asked questions
There is no fixed line, but the tax saving usually only outweighs accountancy fees once profits are comfortably above £30,000–£40,000, and it becomes clearly worthwhile from around £50,000 upward. Below that, sole trading is simpler and barely costs more.
In effect, yes — the company pays corporation tax on its profit, then you pay dividend tax when you extract that profit. The salary-plus-dividend structure is designed to keep the combined bill below what a sole trader would pay at higher profits.
Yes, and many businesses do exactly that once profits grow. You transfer the trade and assets into the new company. There is no need to incorporate on day one.
It narrows the company's advantage but does not remove it at higher profits. With the allowance down to £500, nearly all dividends are taxable, which is why the saving at £60,000 is hundreds rather than thousands of pounds.
A company lets you retain post-tax profit and draw it in a later year — useful if your income varies or you want to stay under a tax threshold. This flexibility is one of the strongest non-headline reasons to incorporate.
Figures are 2025/26 estimates for England, Wales and Northern Ireland and ignore student loans, pension contributions and your personal circumstances. Take tailored advice before changing your business structure.