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 2 + Class 4 | Employer NIC on salary only |
| Extracting profits | Automatic | Salary + dividends |
| Personal liability | Unlimited | Limited to investment |
| Admin burden | Lower | Higher (accounts, CT600, confirmation statement) |
Tax Comparison at Different Profit Levels
Assuming a single director/shareholder taking optimal salary (£12,570) and rest as dividends:
£30,000 Profit
| Sole Trader | Limited Company | |
|---|---|---|
| Income Tax | £3,486 | £0 (salary within PA) |
| NIC (Class 2+4 / Employer) | £2,075 | £0 (below NIC threshold) |
| Corporation Tax | — | £3,312 (19%) |
| Dividend Tax | — | £873 |
| Total Tax | £5,561 | £4,185 |
| Saving | £1,376 |
£50,000 Profit
| Sole Trader | Limited Company | |
|---|---|---|
| Income Tax | £7,486 | £0 |
| NIC | £3,876 | £1,135 (employer NIC) |
| Corporation Tax | — | £7,122 (19%) |
| Dividend Tax | — | £1,811 |
| Total Tax | £11,362 | £10,068 |
| Saving | £1,294 |
£100,000 Profit
| Sole Trader | Limited Company | |
|---|---|---|
| Income Tax | £27,486 | £0 |
| NIC | £5,076 | £1,135 |
| Corporation Tax | — | £20,557 (marginal) |
| Dividend Tax | — | £5,618 |
| Total Tax | £32,562 | £27,310 |
| Saving | £5,252 |
£200,000 Profit
| Sole Trader | Limited Company | |
|---|---|---|
| Income Tax | £72,486 | £0 |
| NIC | £7,076 | £1,135 |
| Corporation Tax | — | £46,393 (25%) |
| Dividend Tax | — | £24,195 |
| Total Tax | £79,562 | £71,723 |
| Saving | £7,839 |
When to Incorporate
Consider incorporating when:
- Profits consistently above £25,000-£30,000
- You want to retain profits in the company for growth
- You need limited liability protection
- You're paying higher-rate Income Tax (40%+)
- You want to split income with a spouse via dividends
Stay sole trader when:
- Profits under £25,000
- You need all the cash for personal expenses
- Your business is simple and low-risk
- You don't want the admin overhead
The Dividend Trap
A company looks cheaper, but you pay tax twice: Corporation Tax on profits, then dividend tax when you extract them. The combined rate is:
| Profit Band | Combined Rate (CT + Dividend Tax) |
|---|---|
| Up to £50,000 | ~27.5% |
| £50,000–£250,000 | ~35-40% |
| Over £250,000 | ~40-45% |
Compare this to sole trader rates of 29-47% (Income Tax + NIC). The company is still cheaper above ~£30k, but the gap narrows at higher levels.
Filing Requirements
Sole Trader
- Self Assessment tax return (once a year)
- Simple bookkeeping
- MTD for Income Tax from April 2026
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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