The short answer: a sole trader pays income tax and Class 4 National Insurance on all profits. A limited company pays Corporation Tax at 19% to 25%, and directors usually take a £12,570 salary plus dividends taxed at 10.75%, 35.75% or 39.35%. A company often becomes worthwhile once profits are consistently above roughly £30,000 to £40,000, but the right answer depends on your circumstances.
Choosing how to structure your business is one of the most important financial decisions you will make. The two most common options in the UK are operating as a sole trader or forming a limited company.
Sole Trader
A sole trader is the simplest way to run a business. You register with HMRC for Self Assessment and report your profits each year. You keep all your profits, but you are personally liable for any business debts.
For 2026/27, income tax is 20% on profits between £12,570 and £50,270, 40% up to £125,140 and 45% above that (rates differ in Scotland). Class 4 National Insurance is 6% between £12,570 and £50,270 and 2% above. Compulsory Class 2 contributions have been abolished; if profits are above the Small Profits Threshold you still receive State Pension credits.
Limited Company
A limited company is a separate legal entity, so your personal assets are protected from business debts. Corporation Tax is 19% on profits up to £50,000, 25% above £250,000, with marginal relief in between.
Side by Side for 2026/27
| Sole trader | Limited company director | |
|---|---|---|
| Tax on business profits | Income tax at 20%, 40% or 45% | Corporation Tax at 19% to 25% |
| National Insurance | Class 4 at 6% and 2% | No employee NI on a £12,570 salary; employer NI of £1,135.50 unless the Employment Allowance applies |
| Taking money out | All profits taxed as earned | Salary plus dividends |
| Dividend tax rates | Not applicable | 10.75% basic, 35.75% higher, 39.35% additional |
| Dividend Allowance | Not applicable | £500 |
| Liability | Unlimited | Limited |
| Admin | Self Assessment only | Accounts, CT600, confirmation statement, payroll |
See our director salary and dividends guide for a worked comparison.
When Should You Switch?
There is no universal answer, but limited company status often becomes more tax efficient once profits are consistently above around £30,000 to £40,000. Other factors include limited liability, plans to take on investors and whether you want to retain profits in the business.
Get Personalised Advice
At Kingsley Accountancy we help Hampshire businesses and clients across the UK choose the right structure from day one and restructure when the time is right. Book a free consultation.