Sole Trader vs Limited Company Tax: Which Saves You More in 2025/26?
The #1 question small business owners ask: should I incorporate? Here's the numbers.
The Key Difference
Sole traders pay Income Tax + Class 4 NICs on all profits. Limited companies pay Corporation Tax on profits, then directors pay Income Tax on salary/dividends they extract.
Tax Rates Comparison (2025/26)
Sole Trader
| Profit Band | Income Tax | Class 4 NIC | Combined |
|---|---|---|---|
| £12,571–£50,270 | 20% | 6% | 26% |
| £50,271–£125,140 | 40% | 2% | 42% |
| Over £125,140 | 45% | 2% | 47% |
Limited Company
| Stage | Rate |
|---|---|
| Corporation Tax (profits up to £50k) | 19% |
| Corporation Tax (profits £50k–£250k) | 26.5% effective |
| Corporation Tax (profits over £250k) | 25% |
| Dividend tax (basic rate) | 8.75% |
| Dividend tax (higher rate) | 33.75% |
Worked Example: £60,000 Profit
As a Sole Trader
| Item | Amount |
|---|---|
| Profit | £60,000 |
| Personal allowance | (£12,570) |
| Income Tax (£37,700 at 20% + £9,730 at 40%) | £11,432 |
| Class 4 NIC (£37,700 at 6% + £9,730 at 2%) | £2,457 |
| Class 2 NIC | £180 |
| Total tax | £14,069 |
| Take-home | £45,931 |
As a Limited Company
| Item | Amount |
|---|---|
| Profit | £60,000 |
| Director's salary | (£12,570) |
| Employer NIC on salary | (£1,136) |
| Taxable profit | £46,294 |
| Corporation Tax at 19% | £8,796 |
| Available for dividends | £37,498 |
| Dividend tax (£37,498 at 8.75%) | £3,281 |
| Total tax (CT + dividend + employer NIC) | £13,213 |
| Take-home | £46,787 |
Saving: £856/year by incorporating at £60k profit.
The Crossover Point
Below about £30,000 profit, there's little tax benefit to incorporating — and the admin costs (accountant, Companies House fees, payroll) may outweigh the saving.
Above £50,000, the benefits become significant — you're avoiding 42% sole trader rates and paying 19% Corporation Tax instead.
Beyond Tax: Other Factors
Advantages of Limited Company
- Limited liability (personal assets protected)
- More professional image
- Easier to take on investors or sell
- Tax-efficient pension contributions
- Corporation Tax loss relief options
Disadvantages
- More admin (annual accounts, CT600, confirmation statement, payroll)
- Less privacy (accounts are public)
- Money extraction is more complex
- Accountancy fees typically £1,000–£3,000/year
CT600 Filing
If you incorporate, you'll need to file a CT600 every year. Taxpipe makes this simple — £59 per filing, no ongoing subscription.
Already incorporated? File your CT600 with Taxpipe — £59, calculated and validated automatically.