The question behind the question
Almost everyone asks this the same way: at what profit should I go limited? There is no such figure. Nothing in the legislation says a business of a certain size must incorporate, or should. What exists is a point where the tax saved outweighs the extra cost and admin of a company, and that point sits somewhere different for everyone.
What moves it most is the bit most comparisons skip. A sole trader pays tax on every pound of profit, whether it reaches their current account or stays in the business. A company pays corporation tax on its profit, and you are taxed personally only on what you take out. So if you need every penny to live on, a company is frequently the more expensive option, because the same money is taxed twice. Leave a chunk in the business and the answer flips. Same business, same profit, opposite result.
What changes when you incorporate
| Sole trader | Limited company | |
|---|---|---|
| Legal position | You and the business are the same thing | The company is a separate legal person |
| If it goes wrong | Business debts are your debts | Liability usually limited to what you have put in |
| Tax on profit | Income tax at 20/40/45% plus Class 4 NI | Corporation tax at 19% to 25% |
| Tax on taking money out | None, it is already taxed | Income tax on salary, dividend tax on dividends |
| Taxed on profit you leave in? | Yes, all of it | Corporation tax only, until you draw it |
| What you file | A Self Assessment return | Accounts, a CT600, a confirmation statement, usually payroll, plus your own Self Assessment |
| Public record | Nothing is published | Accounts and director details are on the register |
| Early losses | Often set against your other income | Carried forward against the company’s future profits |
How each is taxed in 2026/27
A sole trader’s profit is their income: 20% after the £12,570 allowance, 40% from £50,270 and 45% from £125,140, plus Class 4 National Insurance at 6% and then 2%. Class 2 is no longer a charge, and payments on account mean the first January after a good year can be brutal.
A company pays corporation tax at 19% up to £50,000 and 25% above £250,000, with an effective 26.5% in between. Then its money has to get to you. Most directors take a small salary and the rest as dividends, which are taxed again after a £500 allowance. Those dividend rates rose on 6 April 2026 to 10.75%, 35.75% and 39.35%, which narrowed the gap between the two structures and is why a comparison you ran a couple of years ago is worth running again.
The whole thing in one line. A sole trader is taxed on profit. A company director is taxed on what they take out.
Compare your own numbers
Estimated figures, to act as a guide. Two questions gets you an answer. The extras are there if they apply, and the full breakdown is under the result. It is a guide to the size and direction of the difference, not a calculation of your own tax.
What it can’t see
Money left in a company is not yours yet. It shows as a saving, and this year it is, but it sits behind a second charge for whenever you draw it. The real benefit is control over timing. That is also why the student loan and Child Benefit options can move the answer so far: both are worked out on income you actually receive, and profit sitting in a company is not income. What the calculator cannot do is split shares with a spouse or partner, so dividends use two sets of allowances and two basic-rate bands. Done properly that is often worth more than everything else here.
The reasons that aren’t tax
Limited liability is the big one. As a sole trader there is no line between you and the business, so a debt or claim it cannot meet comes to you, and your house is part of that picture. A company puts a legal wall there. Not an absolute one, since directors remain liable for wrongful trading and lenders often want personal guarantees, but for a trade with real risk it is the strongest argument for incorporating and has nothing to do with tax.
Then the practical ones. Early losses can be set against your other income as a sole trader, including the salary from a job you have just left, where a company carries them forward instead. A company’s accounts and directors are public on the Companies House register. Some clients and agencies will only contract with a company. And lenders assess directors on salary and dividends drawn rather than profit made, so a low-salary strategy can work against a mortgage application; mention it to your broker before you incorporate, not after.
So which is it?
Stay a sole trader if you need the whole profit to live on, profits are modest enough that the tax difference is smaller than the extra accountancy cost, the trade carries little risk of being sued, you are making early losses you would rather use now, or it is a sideline next to a job and simplicity is worth more than a few hundred pounds.
Incorporate if profits are comfortably more than you need to draw, so corporation tax at 19% does the work income tax at 40% would otherwise do. Also if the trade carries real liability, clients expect a company, you want to bring in a partner or give someone shares, or paying a spouse with a genuine role makes sense.
You are not deciding forever
Starting as a sole trader and incorporating later is a well-worn path with no penalty attached. Where the business has built up goodwill or owns equipment there can be a capital gains charge on the transfer, and incorporation relief may be available, so it is worth doing deliberately. The sensible time to look is a couple of months before your year end, when you can see how the year actually went rather than how you hoped it would. Going back the other way is considerably more fiddly, so this is the one to get right first time.
A straight answer on your numbers
A calculator works from the figures you give it. The decision usually turns on the things around them, which is a half-hour conversation rather than a form. As an ICAEW Chartered Accountant in Winchester, here is what that looks like:
- A side-by-side on your real figures — including what your accountancy fees would actually be
- Company formation — with the share structure right from the start rather than fixed later
- The switch handled — HMRC, VAT, payroll, bank and contracts, in the right order
- Profit extraction planned — salary, dividends and pension looked at together
Sole trader vs limited company FAQs
At what profit should I switch from sole trader to a limited company?
There is no threshold in the legislation, so anyone quoting one is quoting a rule of thumb. The advantage of a company shows up once your profit is comfortably more than you need to live on, because a company is only taxed on what you draw while a sole trader is taxed on the lot. If you need all of it, a company is often the more expensive option. The calculator on this page works it out on your own numbers.
Do sole traders pay more tax than limited companies?
Not always, and less often than people assume since dividend tax rose two points on 6 April 2026. A sole trader pays income tax at 20%, 40% or 45% plus Class 4 National Insurance at 6% and then 2%. A company pays corporation tax at 19% to 25%, and the director is then taxed again on salary and dividends. Which totals more depends on the profit and on how much of it you take out.
Can I change from sole trader to a limited company later?
Yes, and there is no penalty for starting as a sole trader. You set up the company, move the trade across, tell HMRC, transfer or re-register for VAT, and move contracts and the bank account. If the business has goodwill or owns equipment there can be a capital gains charge on the transfer, and incorporation relief may apply, so it is worth planning rather than doing mid-year on impulse.
Does being a limited company change when I register for VAT?
No. The threshold is £90,000 of taxable turnover on a rolling twelve-month basis and it works the same either way. Incorporating does not reset the clock on turnover the same business has already earned. The rolling twelve-month test is worth understanding whichever structure you pick.
Rates and thresholds are those published for the 2026/27 tax year and the financial year beginning 1 April 2026, correct as at October 2026. This article is general guidance for businesses in England, Wales and Northern Ireland, not advice tailored to your circumstances, and the calculator is illustrative. Scottish income tax rates differ. Speak to us before acting on any of it.
