Sole trader or limited company?

Cerno is a private AI boardroom that runs consequential decisions through a structured process and returns a brief like the one below. The scenario is illustrative: a sole trader in England with £60,000 of profit, who currently draws all of it to live on and is weighing up incorporation because a friend said it saves tax.

The decision in plain terms

As a sole trader you and the business are the same person for tax. You pay Income Tax and Class 4 National Insurance on all the profit, whether you spend it or leave it in the bank.

A limited company is a separate legal person. It pays corporation tax on its profit, and you take money out as a salary, dividends or both. Money you leave in the company has only been taxed at the corporation tax rate. That is where most of the advantage comes from, and it is why the question "how much do you actually need to draw?" matters more than the profit figure itself.

In exchange you take on a company's obligations: annual accounts, a Company Tax Return and a confirmation statement every year, payroll if you pay yourself a salary, director duties, and rules about taking money out. Most people pay an accountant more to handle a company than a sole trader's return.

The numbers that matter

All figures are for the 2026 to 2027 tax year, or the financial year starting 1 April 2026 for corporation tax, and assume England.

Income Tax. Personal allowance £12,570; basic rate 20% to £50,270; higher rate 40% to £125,140; additional rate 45% above that. The personal allowance falls by £1 for every £2 of adjusted net income over £100,000.

Self-employed National Insurance. Class 4 at 6% on profits between £12,570 and £50,270, and 2% above £50,270. Class 2 is treated as paid if profits are £7,105 or more.

Corporation tax. 19% on profits up to £50,000, 25% above £250,000, with marginal relief between the two.

Dividends. A £500 dividend allowance, then 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band.

Employer and employee National Insurance on a director's salary. Employer rate 15% above the secondary threshold of £5,000 a year; employee rate 8% between £12,570 and £50,270, then 2%. The £10,500 Employment Allowance is not available where a sole director is the only employee paid above the secondary threshold.

Companies House. Incorporating online costs £100, and the annual confirmation statement fee is £50.

An illustrative example: £60,000 of profit, all of it drawn.

As a sole trader:

• ›Income Tax: £37,700 at 20% (£7,540) plus £9,730 at 40% (£3,892) = £11,432
• ›Class 4 National Insurance: £37,700 at 6% (£2,262) plus £9,730 at 2% (£194.60) = £2,456.60
• ›Take-home: about £46,111

Through a company, paying a £12,570 salary and the rest as dividends:

• ›Employer National Insurance on the salary: £7,570 at 15% = £1,135.50
• ›Company profit after salary and employer NI: £46,294.50; corporation tax at 19% = £8,795.96
• ›Dividends available: £37,498.54. After the £500 allowance, £36,998.54 at 10.75% = £3,977.34
• ›Take-home: £12,570 salary plus £37,498.54 dividends less £3,977.34 = about £46,091

The two land within about £20 of each other, before the company's extra accountancy fees and Companies House costs. A lower salary of £5,000 avoids employer National Insurance but, in this example, leaves less overall because more profit is taxed in the company and less of the personal allowance is used. Your accountant may find a better split; the point is that at this level the gap is small.

What the board weighed

Drawing is the variable that matters. The CFO's first question was not the profit but how much of it the owner needs to live on. If all of it goes out, the company mostly re-labels the tax. If £15,000 a year can stay in the business, that money is taxed at 19% rather than at up to 42% personally, and the picture changes.

Higher dividend rates narrowed the gap. The basic and higher dividend rates each rose by 2 percentage points from 6 April 2026, from 8.75% and 33.75%. The board treated advice of the "incorporate once you earn over X" kind as out of date unless it was worked at current rates.

Limited liability is real but narrower than it sounds. A sole trader is personally responsible for all business debts. A company's shareholders are responsible only up to what they invested. But banks, landlords and some suppliers ask directors for personal guarantees, and insurance covers many of the risks people actually worry about. The Risk Officer's dissent was that the brief should name insurance as the main protection here, and the actions do.

Mortgages and lenders. Changing structure changes the paperwork a lender sees: salary and dividends rather than self-employed profit, and possibly company accounts. The board did not treat this as a reason to stay put, but it did put it in the timing: talk to a broker before switching if a mortgage application is near.

IR35 can cancel the benefit. For contractors working through their own company for medium or large clients, an engagement assessed inside IR35 is taxed much like employment at source. The inside IR35 brief covers that decision.

When the answer flips

If profits are well above the higher rate threshold and you can leave a meaningful amount in the company each year, the case for incorporating strengthens noticeably.

If you are planning to hire, borrow or bring in a partner, a company structure may suit the next stage. See the brief on taking on a business partner.

If the business carries real liability that insurance does not cover well, the legal separation counts for more.

If most of your income would be inside IR35, or you need every pound you earn to live on, staying a sole trader is usually simpler for little or no tax cost.

Common mistakes

• ›Comparing tax rates instead of take-home. Corporation tax at 19% looks cheap until dividend tax and employer National Insurance are added back.
• ›Using an old rule of thumb. Dividend rates changed for 2026 to 2027; old break-even figures are not reliable.
• ›Ignoring running costs. Accountancy fees, payroll and filings are part of the comparison, not an afterthought.
• ›Treating company money as your own. It belongs to the company. Taking it out outside salary, dividends or proper expenses creates tax problems.
• ›Assuming limited liability covers everything. Personal guarantees and director duties still apply.

Sources

• ›Income Tax rates and Personal Allowances (GOV.UK)
• ›Self-employed National Insurance rates (GOV.UK)
• ›Rates and allowances: Corporation Tax (GOV.UK)
• ›Tax on dividends (GOV.UK)
• ›Changes to tax rates for property, savings and dividend income (GOV.UK)
• ›Rates and thresholds for employers 2026 to 2027 (GOV.UK)
• ›Employment Allowance: eligibility (GOV.UK)
• ›Pay Corporation Tax (GOV.UK)
• ›Companies House fees (GOV.UK)
• ›Running a limited company (GOV.UK)
• ›Business legal structures: sole trader (GOV.UK) and limited company (GOV.UK)

Figures checked on 7 October 2026.