Should you trade as a
limited company?
Compare sole trader vs limited company tax for 2024/25 and 2025/26. See the break-even point and annual savings at your profit level.
Enter your total business profit before any drawings or salary
Estimated annual cost of Ltd company accountancy. Sole traders typically pay less.
Sole Trader
Income Tax
£7,286
Class 4 NI
£2,186
Total Tax
£9,472
Take home
£39,528
Ltd Company
Corp Tax
£7,012
Dividend Tax
£2,572
Employer NI
£522
Total Tax
£12,107
Take home
£37,893
As a sole trader you save £2,635 in tax vs incorporating
Incorporating may still offer other benefits (liability protection, credibility).
Limited companies typically become tax-efficient at profits above ~£35,000. This is a simplified estimate. Consult a qualified accountant before incorporating.
- Limited Company
- A separate legal entity from its owner. A director pays themselves via salary and dividends. The company pays Corporation Tax on profits; the director pays Income Tax on their remuneration. This separation creates tax planning opportunities, but also brings additional admin costs.
How the Tax Maths Actually Work
As a sole trader, your entire net profit is subject to Income Tax (20%/40%/45%) and Class 4 National Insurance (6% up to £50,270, then 2%). There is no separation between you and your business: every pound of profit is your taxable income.
A limited company pays Corporation Tax at 19% on profits up to £50,000 (the small profits rate). The director then extracts money through a combination of salary and dividends. The salary is a deductible expense for the company, reducing its Corporation Tax bill. Dividends are paid from post-tax profits and taxed at lower rates than employment income: 8.75% (basic), 33.75% (higher), and 39.35% (additional). Crucially, dividends do not attract National Insurance contributions.
| Profit Level | Sole Trader Tax | Ltd Company Total Tax | Annual Saving (Ltd) |
|---|---|---|---|
| £20,000 | ~£1,486 | ~£3,500 | -£2,014 (Ltd costs more) |
| £35,000 | ~£5,886 | ~£5,900 | ~£0 (break-even) |
| £50,000 | ~£11,286 | ~£9,200 | ~£2,086 (Ltd wins) |
| £80,000 | ~£23,486 | ~£18,000 | ~£5,486 (Ltd wins clearly) |
Note: Ltd figures are net of accountancy fees. Figures are approximate and for illustration.
The Break-Even Point: Why £35,000 Matters
At £35,000 net profit, the tax savings from a limited company structure are almost exactly offset by the additional costs of running one. A sole trader at this level pays approximately £5,886 in income tax and NI. A limited company director, using the optimal salary plus dividend strategy, pays around £3,900 in combined Corporation Tax and personal tax, but add £1,500 to £2,000 in accountancy fees, and the totals converge.
Above £50,000, the gap widens significantly. The sole trader starts paying 40% income tax on profits above £50,270, while the Ltd company still pays just 19% Corporation Tax. At £80,000, the Ltd saves roughly £5,486 per year even after all costs. The higher your profits, the stronger the case for incorporation.
Hidden Costs of a Limited Company
Tax savings are only part of the picture. A limited company brings additional costs and obligations that sole traders do not face. Accountancy fees typically run £1,500 to£3,000 per year for a one-person Ltd, covering annual accounts, corporation tax returns, payroll, and dividend paperwork.
You must also file an annual confirmation statement with Companies House (£13), keep a separate business bank account, and maintain statutory records. Your accounts become public: anyone can view your company financials on Companies House. If you work primarily for one client, IR35 rules may apply, potentially treating your Ltd income as employment income for tax purposes, eliminating the dividend advantage entirely.
The Optimal Salary + Dividend Strategy
The standard tax-efficient extraction strategy is to pay yourself a salary of £12,570, exactly equal to the Personal Allowance. This means zero income tax on the salary, and because it falls below the NI Secondary Threshold, the company pays no employer NI either. The salary is a deductible expense, reducing your Corporation Tax bill.
Remaining profits (after Corporation Tax) are then paid as dividends. The first £500 of dividends is covered by the dividend allowance (tax-free). Dividends above that are taxed at 8.75% within the basic rate band, far lower than the combined 26% (income tax + NI) a sole trader pays on the same income. No National Insurance applies to dividends at all.
In most cases, sole traders earning under £35,000 net profit are better off staying unincorporated once accountancy fees and administrative overhead are factored in.
Common Mistakes That Cost You Money
Choosing between a sole trader and a limited company is one of the biggest structural decisions you will make. These are the mistakes that erode the tax advantage or create unexpected liabilities.
Treating Ltd company funds as personal cash. A Ltd company is a separate legal entity. Withdrawing money without declaring it as salary or dividends is an unauthorised director’s loan – taxable, interest-bearing, and scrutinised by HMRC.
Ignoring IR35 risk. If you operate primarily for one client through a Ltd company, HMRC may deem you a disguised employee under IR35. This eliminates the dividend advantage and results in employment tax liability on all income.
Forgetting the Corporation Tax marginal rate. Profits between £50,000 and £250,000 are taxed at a blended rate up to 26.5% under marginal relief – not the flat 19% small profits rate. This narrows the gap between Ltd and sole trader above that threshold.
Setting salary too high and triggering employer NI. The optimal salary is typically at or just below the Personal Allowance (£12,570) and below the NI Secondary Threshold (£9,100 for employer NI purposes). Salary above £9,100 costs the company 15% employer NI.
Not planning ahead for dissolution. When you eventually close the company, distributing remaining reserves as a capital distribution may attract Capital Gains Tax – but the Business Asset Disposal Relief rate of 10% is significantly better than income tax. Plan the exit before you incorporate.
The best way to avoid these pitfalls is to model the numbers before you incorporate. Use the calculator above to compare your exact tax position under both structures.
Reporting to HMRC – Deadlines and Requirements
Corporation Tax: the CT600 return is due 12 months after the end of your accounting period, but the tax itself must be paid 9 months and 1 day after the period end. For small companies, this means paying before the return is filed. Annual Accounts must be filed at Companies House within 9 months of the accounting period end (21 months from incorporation for the first accounts). Late filing incurs automatic penalties starting at £150.
A Confirmation Statement must be submitted annually to Companies House confirming company details. The filing fee is £13. Missing this statement risks the company being struck off the register. As a director you must also file a personal Self Assessment return by 31 January each year, declaring your salary, dividends, and any other income.
Dividends must be supported by dividend vouchers and board minutes. TapTax tracks your company deadlines and sends reminders for Corporation Tax payments, Companies House filings, and Self Assessment submissions so nothing slips through the cracks.
- Under £35,000 profit: sole trader is typically simpler and cheaper overall
- Above £50,000 profit: Ltd company typically saves £2,000+ per year after all costs
- Corporation Tax on the first £50,000 of profit is just 19%, significantly below higher rate income tax
- IR35 risk: if you work primarily for one client, HMRC may challenge your Ltd company status
- Incorporation is straightforward, but dissolving a company has tax costs: plan before you switch
- Corporation Tax is paid 9 months and 1 day after year-end, before you file the return, so budget cash reserves accordingly
- Director’s loans over £10,000 must be reported on your P11D and attract a 2% benefit-in-kind charge annually
Related calculators
Salary + dividend strategy
Models the optimal £12,570 salary with remaining profits as dividends
All costs included
Factors in corporation tax, employer NI, dividend tax, and accountancy fees
Clear recommendation
Tells you exactly which structure saves more and by how much
Frequently asked questions
Related calculators
Make the right decision for your business.
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