If you work for yourself, one of the first big decisions is whether to trade as a sole trader or set up a limited company. Both are common, both are legal ways to run a small business, and neither is "best" for everyone.
This guide from SYLWIA KLOCEK LTD sets out the main differences in plain English: personal liability, admin, how each is taxed using the official 2026/27 rates, and how you take money out. It also includes a simple calculator-style comparison so you can see how the numbers can differ at a few example profit levels.
It is general information, not personal tax advice. The right structure depends on your profit, your other income, your plans and your attitude to risk and admin.
Sole trader vs limited company: the key differences at a glance
| Sole trader | Limited company | |
|---|---|---|
| Legal status | You and the business are the same legal person | The company is a separate legal entity from its owners |
| Liability for business debts | Unlimited: you are personally responsible for all business debts | Limited: owners are generally responsible only up to the value of their investment |
| Setting up | Register for Self Assessment with HMRC | Register the company with Companies House, then set up Corporation Tax |
| Tax on profits | Income Tax plus Class 4 National Insurance on your profits | Corporation Tax on company profits, then personal tax on what you take out |
| Taking money out | Drawings: profits are yours, taxed whether you withdraw them or not | Usually a salary (through payroll) plus dividends from post-tax profits |
| Annual filing | Self Assessment tax return | Company accounts, Company Tax Return, confirmation statement, payroll filings, and usually a personal tax return too |
| Privacy | Your accounts are not published | Some company details and accounts are on the public register |
| Admin and running costs | Generally lower | Generally higher |
Sources: GOV.UK: set up as a sole trader; GOV.UK: set up a private limited company.
Liability and admin
Liability
As a sole trader you have unlimited liability. GOV.UK explains that sole traders are personally responsible for all of the debts of the business, so if things go wrong your personal assets could be at risk. Business insurance can give some extra protection. (GOV.UK)
A limited company has limited liability. Owners are responsible for business debts only up to the value of their financial investment. (GOV.UK) In practice, lenders and landlords sometimes ask directors for personal guarantees, and directors have legal duties of their own, so limited liability is a protection, not a shield against everything.
Admin
Being a sole trader is the simplest structure to set up and run. You keep business records, work out your profit and file a Self Assessment tax return each year. If your self-employment and property income is high enough, you may also need to use Making Tax Digital for Income Tax, which already applies from 6 April 2026 to those with qualifying income over £50,000 in 2024/25, with lower thresholds following in later years. (GOV.UK)
A limited company has more formal duties. Directors must keep company and accounting records, file accounts and tax returns for the company, and check their Companies House details each year through a confirmation statement. Directors can use an accountant, but they remain legally responsible for the company's records and accounts. (GOV.UK) If you pay yourself a salary, the company also needs to run payroll.
How each is taxed in 2026/27
The figures below are the official GOV.UK rates for the 2026/27 tax year (6 April 2026 to 5 April 2027), and for Corporation Tax the financial year starting 1 April 2026. Income Tax bands shown are for England, Wales and Northern Ireland. Scotland has different Income Tax bands for earnings and self-employed profits.
Sole trader: Income Tax and National Insurance
Your profit (income minus allowable expenses) is taxed as your personal income, whether you leave it in the business bank account or not. If you're not sure what counts as a business cost, see our guide to expenses you can claim as a sole trader.
Income Tax 2026/27 (GOV.UK: Income Tax rates)
| Band | Taxable income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
The Personal Allowance goes down by £1 for every £2 of adjusted net income above £100,000, so it is zero at £125,140 or above. (GOV.UK)
Self-employed National Insurance 2026/27 (GOV.UK: self-employed NI rates)
- Class 4: 6% on profits between £12,570 and £50,270, and 2% on profits over £50,270.
- Class 2: if your profits are £7,105 or more, Class 2 contributions are treated as paid to protect your National Insurance record, so you do not have to pay them. Below £7,105 you can choose to pay voluntary Class 2 at £3.65 a week.
Limited company: Corporation Tax, then tax on what you take out
A company pays Corporation Tax on its taxable profits. Salary paid to directors and employer's National Insurance are normally business costs that reduce those profits.
Corporation Tax, financial year starting 1 April 2026 (GOV.UK: Corporation Tax rates and allowances)
- Small profits rate: 19% for profits of £50,000 or less.
- Main rate: 25% for profits over £250,000.
- Marginal Relief: available for profits between £50,000 and £250,000, which gives a gradual increase in the effective rate (standard fraction 3/200). (GOV.UK: Marginal Relief)
- The £50,000 and £250,000 limits are reduced for short accounting periods and for associated companies. (GOV.UK)
Director's salary: Class 1 National Insurance 2026/27 (GOV.UK: rates and thresholds for employers 2026 to 2027)
- Employee (primary) NI: 0% up to the primary threshold of £12,570 a year, 8% between £12,570 and £50,270, and 2% above £50,270.
- Employer (secondary) NI: 15% on earnings above the secondary threshold of £5,000 a year.
- Lower earnings limit: £6,708 a year.
- National Insurance for company directors is worked out under special rules, so check how it applies before setting a salary.
- Employment Allowance (up to £10,500 for 2026/27) can reduce an employer's NI bill, but if a company has only one director, that director must not be the only employee liable for secondary Class 1 National Insurance. So a one-person company where the director is the only employee usually cannot claim it. (GOV.UK: Employment Allowance eligibility)
Dividends 2026/27 (GOV.UK: tax on dividends)
- Dividend allowance: £500 a year.
- Dividend tax rates on dividends above the allowance: 10.75% (basic rate), 35.75% (higher rate), 39.35% (additional rate).
- Dividend income is added to your other income to work out which band it falls in. Any dividend income within your unused Personal Allowance is not taxed.
Sole trader vs limited company calculator: worked examples for 2026/27
Below is a simple sole trader vs limited company tax calculator-style comparison. These are illustrations, not advice. They use only the official 2026/27 rates listed above and a set of simplifying assumptions:
- England, Wales or Northern Ireland Income Tax bands; no other income; standard Personal Allowance.
- "Profit" means profit before tax (and, for the company, before the director's salary).
- Sole trader: Income Tax plus Class 4 NI on the full profit. Class 2 is treated as paid.
- Limited company: one director-shareholder, who is the only employee (so no Employment Allowance). Salary of £12,570, with employer NI at 15% on the £7,570 above £5,000 (£1,136). No employee NI at that salary. All remaining profit after Corporation Tax is paid out as dividends in the same tax year.
- Company running costs (accountancy, software, filings) are ignored, as are pension contributions, student loans and any other reliefs.
- Figures are rounded to the nearest pound, so totals may differ by £1.
| Example profit | £30,000 | £50,000 | £80,000 |
|---|---|---|---|
| Sole trader | |||
| Income Tax | £3,486 | £7,486 | £19,432 |
| Class 4 NI | £1,046 | £2,246 | £2,857 |
| Total tax and NI | £4,532 | £9,732 | £22,289 |
| Left for you | £25,468 | £40,268 | £57,711 |
| Limited company (salary £12,570 + dividends) | |||
| Employer NI on salary | £1,136 | £1,136 | £1,136 |
| Company taxable profit | £16,295 | £36,295 | £66,295 |
| Corporation Tax | £3,096 (19%) | £6,896 (19%) | £13,818 (with Marginal Relief) |
| Dividends paid | £13,199 | £29,399 | £52,476 |
| Dividend tax | £1,365 | £3,107 | £9,282 |
| Total tax and NI | £5,597 | £11,138 | £24,235 |
| Left for you (salary + dividends after tax) | £24,403 | £38,862 | £55,765 |
What these examples show
On these assumptions, taking all of the profit out of a limited company in the same year produces a slightly higher combined tax bill than trading as a sole trader at each of the three example profit levels. That is mainly because of Corporation Tax, the 15% employer NI rate and the 2026/27 dividend tax rates.
That does not mean a limited company is never worth it. Real outcomes can be quite different, because they depend on:
- the mix of salary and dividends (a different salary level changes the result)
- whether you need to take all the profit out each year, or can leave some in the company
- your other income, and where you live in the UK
- pension contributions, which can be made by the company
- whether other people work in the business or own shares
- the cost of running a company
If you want a figure for your own situation, it is worth having an accountant run the numbers with your actual profit and plans, rather than relying on a generic online calculator.
How you take money out: drawings vs salary and dividends
As a sole trader: drawings
As a sole trader, the profit is yours. You can move money from the business account to your personal account whenever you like. These are called drawings, and they are not a business expense. You pay tax on the profit, not on the drawings, so taking more or less money out during the year does not change your tax bill.
How to pay yourself as a limited company
The company's money belongs to the company, not to you personally, and there are rules about taking it out. (GOV.UK) Most owner-directors use a combination of:
- A salary through payroll. It is a cost for the company and is subject to PAYE and Class 1 National Insurance once it goes over the relevant thresholds.
- Dividends paid to shareholders from profits left after Corporation Tax. Dividends can only be paid out of available profits, and they should be properly declared and recorded.
Other options include employer pension contributions and repaying money you have lent to the company. For a fuller explanation of how dividends work, who is entitled to them and the paperwork involved, see our guide to paying yourself dividends from a limited company.
If your dividends are more than your unused Personal Allowance plus the dividend allowance, you need to report them to HMRC, usually through Self Assessment. (GOV.UK)
When switching to a limited company can make sense
There is no single profit level at which a limited company becomes the right choice, and there is no guaranteed tax saving from switching. It can be worth looking at a limited company if some of the following apply to you:
- You want to separate business risk from personal assets. Limited liability is often the main non-tax reason to incorporate.
- You don't need to take all the profit out each year. Profit kept in the company is taxed at Corporation Tax rates rather than your personal rates. Tax is usually due later when you take that money out, so this is more about timing and flexibility than avoiding tax.
- Your profits are rising into the higher-rate band. At these levels the comparison can change, depending on how you take the money out.
- You plan to grow, take on staff, bring in a business partner or raise investment, where a company structure and shares can be useful.
- Clients or contracts expect it. Some larger clients prefer to work with limited companies.
It may be less suitable if your profits are modest, you need every pound of profit for living costs, or you'd rather keep admin and running costs to a minimum. If you work through a limited company for clients who would otherwise treat you like an employee, the off-payroll working (IR35) rules can also be relevant.
Switching is a decision to make with advice based on your real numbers, not a percentage you read online.
How to register as a sole trader or set up a limited company
Registering as a sole trader
- Choose a business name (you can trade under your own name). (GOV.UK)
- Start keeping records of your income and expenses from day one.
- Register for Self Assessment if you earn more than £1,000 from self-employment in a tax year. For income in the 2025/26 tax year, the deadline to register was 5 October 2026; a later registration could mean a penalty. (GOV.UK)
- Check whether you need to register for VAT or any other taxes.
Setting up a limited company
GOV.UK sets out the main steps (GOV.UK: set up a private limited company):
- Decide whether the company is limited by shares (most small businesses) or by guarantee.
- Appoint at least one director. A company secretary is optional.
- Decide who the shareholders are, and identify any people with significant control.
- Prepare the memorandum and articles of association.
- Choose a company name and a registered office address, and pick a SIC code.
- Register the company with Companies House, then add Corporation Tax to your business tax account.
Switching from sole trader to limited company
If you already trade as a sole trader, switching involves more than registering a company. Typical steps include telling HMRC you have stopped trading as a sole trader, filing a final Self Assessment return for the sole trade, opening a business bank account for the company, moving contracts, insurance and any VAT registration across, and deciding how equipment, stock or goodwill should be transferred. The tax treatment of transferring assets can be complex, so get advice before you move anything.
If you'd like help, SYLWIA KLOCEK LTD offers support with setting up a limited company.
Frequently asked questions
Is it better to be a sole trader or a limited company in the UK?
Neither is better for everyone. Being a sole trader is simpler and cheaper to run, but you have unlimited personal liability. A limited company gives limited liability and more flexibility over when you take profits, but it has more admin and costs. The right choice depends on your profit, other income, plans and circumstances.
Do you pay less tax as a limited company?
Not necessarily. Using 2026/27 rates, a director who takes all the company's profit out each year can pay a similar or higher total amount of tax than a sole trader with the same profit. Any difference depends on your salary and dividend mix, whether you leave profits in the company, your other income and your circumstances.
What are the 2026/27 Corporation Tax rates?
For the financial year starting 1 April 2026, the small profits rate is 19% for profits of £50,000 or less and the main rate is 25% for profits over £250,000. Marginal Relief applies to profits between £50,000 and £250,000.
How much National Insurance does a sole trader pay in 2026/27?
Sole traders pay Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% on profits above £50,270. If profits are £7,105 or more, Class 2 contributions are treated as paid, so you do not have to pay them.
How do I pay myself from a limited company?
Most owner-directors take a salary through payroll and dividends from profits left after Corporation Tax. Dividends above the £500 dividend allowance are taxed at 10.75%, 35.75% or 39.35% in 2026/27, depending on your tax band.
Can I switch from sole trader to limited company later?
Yes. Many people start as sole traders and incorporate later. You will need to register the company, tell HMRC you have stopped trading as a sole trader, and move contracts, bank accounts and any assets across. Getting advice first can help avoid unexpected tax on transferring assets.
Talk to SYLWIA KLOCEK LTD about your business structure
Whether you're starting out or wondering if it's time to switch, SYLWIA KLOCEK LTD can help you look at your own figures and understand your options.
- Staying a sole trader? See our accounting for sole traders service. It covers Self Assessment tax returns, bookkeeping and Making Tax Digital support.
- Already running a company? See our limited company accounting service. It covers year-end accounts, Corporation Tax, payroll and dividends.
- Thinking of incorporating? Find out about setting up a limited company. That includes Companies House registration and HMRC, VAT and payroll setup.
Book a free discovery call with Sylwia.
This article is general information based on GOV.UK rates for the 2026/27 tax year, checked on 9 November 2026. It is not personal tax advice. Tax rules and rates can change, and the best structure for you depends on your circumstances.