Sole Trader vs Limited Company: Tax Comparison 2025/26
Should you incorporate? Here's a detailed tax comparison for 2025/26.
The Key Difference
| Sole Trader | Limited Company | |
|---|---|---|
| Tax on profits | Income Tax (20–45%) | Corporation Tax (19–25%) |
| National Insurance | Class 4 only (6%/2%) | Employer NIC 15% on salary above £5,000 |
| Extracting profits | Automatic | Salary + dividends |
| Personal liability | Unlimited | Limited to investment |
| Admin burden | Lower | Higher (accounts, CT600, confirmation statement) |
Note: Class 2 NIC was abolished from April 2024. Sole traders now pay Class 4 only.
Tax Comparison at Different Profit Levels
Assumptions: single director/shareholder, salary £12,570 (equal to personal allowance), remaining post-tax profit distributed as dividends, no Employment Allowance (not available to companies whose sole paid employee is the sole director).
From April 2025, employer NIC applies at 15% on salary above the new £5,000 secondary threshold. On a £12,570 salary this costs £1,135 — and applies regardless of profit level.
£30,000 Profit
| Sole Trader | Limited Company | |
|---|---|---|
| Income Tax | £3,486 | £0 (salary within PA) |
| NIC (Class 4 / Employer NIC) | £1,046 | £1,135 |
| Corporation Tax | — | £3,096 (19%) |
| Dividend Tax | — | £1,111 |
| Total Tax | £4,532 | £5,342 |
| Difference | Sole trader £810 cheaper |
£50,000 Profit
| Sole Trader | Limited Company | |
|---|---|---|
| Income Tax | £7,486 | £0 |
| NIC (Class 4 / Employer NIC) | £2,246 | £1,135 |
| Corporation Tax | — | £6,896 (19%) |
| Dividend Tax | — | £2,529 |
| Total Tax | £9,732 | £10,560 |
| Difference | Sole trader £828 cheaper |
£100,000 Profit
| Sole Trader | Limited Company | |
|---|---|---|
| Income Tax | £27,432 | £0 |
| NIC (Class 4 / Employer NIC) | £3,257 | £1,135 |
| Corporation Tax | — | £19,118 (marginal relief) |
| Dividend Tax | — | £13,203 |
| Total Tax | £30,689 | £33,456 |
| Difference | Sole trader £2,767 cheaper |
£200,000 Profit
| Sole Trader | Limited Company | |
|---|---|---|
| Income Tax | £76,203 (PA fully withdrawn) | £2,514 (PA also withdrawn for director) |
| NIC (Class 4 / Employer NIC) | £5,257 | £1,135 |
| Corporation Tax | — | £45,618 (marginal relief) |
| Dividend Tax | — | £42,726 |
| Total Tax | £81,460 | £91,993 |
| Difference | Sole trader £10,533 cheaper |
Why the shift? The April 2025 employer NIC changes — rate up to 15%, secondary threshold cut from £9,100 to £5,000 — added a £1,135 dead cost for directors paying themselves the £12,570 optimal salary. Combined with the abolition of Class 2 NIC (which sole traders used to pay), the balance has tilted in favour of the sole trader for anyone who needs to extract all their profits each year.
At £200,000, both structures lose the personal allowance: the sole trader's income exceeds £125,140 directly, and so does the director's total income of salary plus dividends.
When to Incorporate
For immediate full extraction of all profits, the sole trader is cheaper at every illustrated profit level under 2025/26 rules. Incorporation makes sense for different reasons:
Consider incorporating when:
- You can retain profits in the company — paying CT at 19–25% now and extracting in lower-income years (retirement, maternity, sabbatical) is significantly more efficient than paying 40–45% personal tax immediately
- You have a working spouse or partner who can receive dividends within their own personal allowance and basic rate band
- You need limited liability protection
- You're building a business to sell (Business Asset Disposal Relief at 14% on gains up to £1m for qualifying disposals)
- You want to make employer pension contributions through the company
Stay sole trader when:
- You need all the cash for personal expenses each year
- Profits are modest and you can't afford to leave money in the company
- Your business is simple and low-risk
- You don't want the accounting overhead (annual accounts, CT600, confirmation statement)
The Dividend Trap
A company looks cheaper on paper — Corporation Tax rates are 19–25% versus Income Tax rates up to 45%. But you pay tax twice: Corporation Tax on profits, then dividend tax when you extract them.
The combined effective rate on each £1 of company profit distributed as dividends:
| Profit Band | Combined Rate (CT + Dividend Tax) |
|---|---|
| Up to ~£50,000 (small profits rate 19%) | ~26% (basic rate dividends at 8.75%) |
| £50,000–£250,000 (marginal relief) | ~29–50% (rises steeply as dividends push into higher rate) |
| Over £250,000 (main rate 25%) | ~32–54% |
Sole trader rates for comparison: 20–45% Income Tax plus 2–6% Class 4 NIC (with the personal allowance reducing the effective rate at lower incomes).
The combined company rate is competitive only when the alternative would be 40%+ sole trader tax AND you can either retain the profits or distribute them in a lower-income year. For basic-rate taxpayers extracting everything, the company costs more.
Filing Requirements
Sole Trader
- Self Assessment tax return (once a year)
- Simple bookkeeping
- MTD for Income Tax from April 2026 (for self-employed with turnover above £50,000)
Limited Company
- CT600 Corporation Tax return (HMRC)
- Annual accounts (Companies House)
- Confirmation statement (Companies House)
- Self Assessment for dividends (personal)
- Payroll for salary (monthly RTI)
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