Sole Trader vs Limited Company Calculator UK

Sole Trader vs Limited Company: UK Tax Comparison

The decision between trading as a sole trader versus incorporating as a limited company is one of the most important tax decisions for UK self-employed professionals. As a sole trader, all profit is subject to Income Tax and National Insurance Class 2 and Class 4 at your personal marginal rate. As a limited company director, you can split income between a low salary and dividends, reducing your National Insurance liability significantly — since dividends do not attract NI contributions.

For the 2025-26 tax year, the key rates are: Income Tax at 20% (basic), 40% (higher), 45% (additional); Class 2 NI at £3.45/week; Class 4 NI at 6% on profits £12,570-£50,270 then 2%; Corporation Tax at 25% (for profits over £250,000) or 19% small profits rate (under £50,000) with marginal relief between; Dividend Tax at 8.75% (basic), 33.75% (higher), 39.35% (additional).

When a Limited Company Saves More Tax

A limited company typically saves tax when annual profits exceed approximately £35,000-£40,000. Below this level, the accountancy costs (£1,000-£2,500/year for a company vs £300-£500 for self-assessment) often outweigh the tax savings. Above this threshold, the NI saving on dividends versus sole trader profits accelerates, and the gap widens with income. At £60,000 profit, a limited company typically saves £3,000-£5,000 annually after accounting for higher compliance costs.

Hidden Costs of Limited Company Status

The tax saving must be weighed against additional costs and complexity: Companies House confirmation statement (£34/year), Corporation Tax return (CT600), PAYE registration and payroll if paying a salary, more complex accountancy (typically £1,500-£2,500 vs £400-£700 for sole trader), public registration of accounts, and IR35 risk for contractors (your contracts must pass IR35 rules to use the company structure). For many professionals, net savings above £500-£1,000 per year only emerge above £45,000-£50,000 in profits.

The Optimal Director Salary Strategy

Most limited company directors pay themselves a salary exactly at the Personal Allowance (£12,570 for 2025-26) or Secondary Threshold (£9,100 if not already qualifying for State Pension). At £12,570, you eliminate income tax on the salary and maintain NI contribution history for State Pension entitlement, while the salary is deductible from corporate profit reducing Corporation Tax. All remaining profit after Corporation Tax is then drawn as dividends using the £500 annual dividend allowance first (0% tax), then taxed at dividend rates.