Sole Trader vs Ltd Calculator: Which Saves Tax

The Most Important Structure Decision

At some point in every growing sole trader's journey, the question arises: should I form a limited company? The answer almost always comes down to tax. While there are other considerations — liability protection, professional credibility, administrative complexity — the tax difference is what drives most incorporation decisions.

This post provides a detailed comparison of the tax burden under both structures at multiple profit levels for the 2025/26 tax year. By the end, you'll understand exactly where the breakeven points lie and what factors tip the balance.

For a broader comparison that includes non-tax factors, see our comprehensive guide to sole trader vs limited company in 2026.

How Sole Traders Are Taxed

As a sole trader, your business profit is taxed as personal income. You pay:

• Income Tax at 20% (basic rate), 40% (higher rate), or 45% (additional rate) on your taxable profit after your personal allowance of £12,570
• Class 2 National Insurance at £3.45 per week (£179.40 per year)
• Class 4 National Insurance at 6% on profits between £12,570 and £50,270, and 2% above £50,270

The calculation is straightforward: your business profit is your income, and you're taxed on it directly.

How Limited Company Directors Are Taxed

A limited company creates a separate legal entity. The company pays Corporation Tax on its profits, and you extract money through a combination of salary and dividends:

• Corporation Tax at 19% on profits up to £50,000 (small profits rate), rising on a marginal basis to 25% for profits above £250,000
• Employer's National Insurance at 15% on salary above £5,000 (from April 2025, the secondary threshold)
• Employee's National Insurance at 8% on salary between £12,570 and £50,270
• Income Tax on salary at normal rates
• Income Tax on dividends at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) after the £500 dividend allowance

The optimal extraction strategy is typically a small salary (around £12,570 to use the personal allowance, or lower at £5,000 to avoid employer's NI) combined with dividends for the remainder. The right balance depends on your circumstances.

Side-by-Side Comparison at Different Profit Levels

Let's compare the total tax paid under each structure, assuming the company director takes an optimal mix of salary and dividends. For the company examples, I'm using a salary of £12,570 (to fully utilise the personal allowance) with the remainder taken as dividends.

£30,000 Profit

Sole Trader: | Component | Amount | |---|---| | Income Tax | £3,486 | | Class 2 NI | £179 | | Class 4 NI | £1,046 | | Total | £4,711 |

Limited Company: | Component | Amount | |---|---| | Corporation Tax (19% on £30,000 minus salary costs) | £2,868 | | Employer's NI on salary | £1,136 | | Income Tax on salary | £0 | | Employee's NI on salary | £0 | | Dividend tax on remaining profit | £768 | | Total | £4,772 |

Winner at £30,000: Sole trader, by approximately £61. The administrative cost and complexity of a limited company is not justified at this level.

£50,000 Profit

Sole Trader: | Component | Amount | |---|---| | Income Tax | £7,486 | | Class 2 NI | £179 | | Class 4 NI | £2,246 | | Total | £9,911 |

Limited Company: | Component | Amount | |---|---| | Corporation Tax | £5,892 | | Employer's NI | £1,136 | | Dividend tax | £2,041 | | Total | £9,069 |

Winner at £50,000: Limited company, by approximately £842. The saving is meaningful but may be offset by the additional costs of running a company (accountancy fees, Companies House filing, etc.).

£70,000 Profit

Sole Trader: | Component | Amount | |---|---| | Income Tax (basic + higher rate) | £15,486 | | Class 2 NI | £179 | | Class 4 NI | £2,642 | | Total | £18,307 |

Limited Company: | Component | Amount | |---|---| | Corporation Tax | £8,892 | | Employer's NI | £1,136 | | Dividend tax | £4,688 | | Total | £14,716 |

Winner at £70,000: Limited company, by approximately £3,591. The saving now clearly exceeds the additional running costs.

£100,000 Profit

Sole Trader: | Component | Amount | |---|---| | Income Tax (basic + higher rate) | £27,486 | | Class 2 NI | £179 | | Class 4 NI | £3,242 | | Total | £30,907 |

Limited Company: | Component | Amount | |---|---| | Corporation Tax | £13,592 | | Employer's NI | £1,136 | | Dividend tax | £9,478 | | Total | £24,206 |

Winner at £100,000: Limited company, by approximately £6,701.

The Hidden Costs of Incorporation

The tax comparison above tells only part of the story. Running a limited company comes with costs that sole traders don't face:

Accountancy fees: A sole trader's accounts can be relatively simple. A limited company requires statutory accounts prepared under the Companies Act, a Corporation Tax return (CT600), and potentially payroll administration. Accountancy fees are typically £1,000-£3,000 per year higher for a limited company versus a sole trader.

Companies House fees: Annual filing fees and confirmation statements cost around £50-£70 per year — modest but not zero.

Administrative burden: Director responsibilities include maintaining statutory registers, filing annual returns, keeping minutes of meetings, and complying with Companies Act requirements. This takes time even if your accountant handles most of it.

Loss of privacy: Company accounts and director details are publicly available through Companies House. As a sole trader, your financial information is private between you and HMRC.

Reduced flexibility: Extracting money from a limited company is less flexible than simply drawing from sole trader profits. You must pay yourself through salary or dividends, and there are rules about when dividends can be declared (only from distributable profits).

The GOV.UK guide to running a limited company outlines the full range of director obligations.

The Real Breakeven Point

When you factor in the additional costs of running a limited company, the true breakeven point is typically around £40,000-£50,000 of annual profit. Below this level, the tax savings are insufficient to justify the extra cost and complexity. Above this level, the savings grow progressively larger.

However, this is a generalisation. Your specific breakeven point depends on:

• Your accountancy fees (which vary significantly by provider and complexity)
• Whether you have other income sources that affect your tax bands
• Whether you plan to reinvest profits in the business (retained profits in a company are taxed at Corporation Tax rates only until extracted)
• Your long-term plans (pension contributions, selling the business, etc.)

Factors Beyond Tax

While tax is the primary driver, other factors may influence your decision:

Limited liability: A company provides legal separation between your personal assets and business debts. As a sole trader, you're personally liable for all business debts. If you operate in a sector with significant risk — construction, property development, consultancy with high-value contracts — this protection has real value.

Professional perception: Some clients, particularly larger organisations and public sector bodies, prefer to contract with limited companies. This may or may not apply to your market.

Pension contributions: Both sole traders and company directors can make personal pension contributions with tax relief. However, company directors can also make employer pension contributions, which are a deductible expense for the company and not subject to National Insurance. This can provide additional tax efficiency at higher income levels.

Selling the business: If you eventually want to sell your business, a limited company structure is generally more straightforward and tax-efficient. Business Asset Disposal Relief (formerly Entrepreneurs' Relief) can reduce the Capital Gains Tax rate on the sale to 10%.

According to ICAEW tax guidance, the incorporation decision should be reviewed periodically as circumstances change — what's optimal at one profit level may not be optimal at another.

When to Make the Switch

If the numbers suggest incorporation is beneficial, the timing matters:

Start of a new tax year: Incorporating from 6 April creates a clean break between your sole trader and company tax affairs.

When profits are consistently above the breakeven: One good year isn't enough — you need confidence that your profits will sustain the higher level to justify the ongoing costs.

After taking professional advice: The worked examples above are illustrative. Your specific circumstances — other income, spouse's tax position, pension plans, IR35 considerations — can significantly alter the optimal structure. See our IR35 self-assessment checklist if you work as a contractor.

Before major contracts: If you're about to win a large contract that will push your income significantly higher, incorporating in advance allows you to benefit from the company structure from the start.

Let Penny Help You Monitor the Numbers

Whatever structure you choose, accurate bookkeeping is essential. As a sole trader, I track your profit and tax position in real time. If your income grows and incorporation starts to make financial sense, I'll flag it.

You can also explore our guide on how much tax you'll pay as a sole trader and our self-assessment guide for practical filing advice.

Ready to get your numbers in order so you can make this decision with confidence? Sign up for Accounted and I'll keep your books immaculate while you focus on growing your business.

Penny, your AI bookkeeper, tracks your tax position in real time and flags opportunities to reduce your bill. Meet Penny →