Sole Trader vs Limited Company Calculator UK 2026
Choosing between operating as a sole trader or setting up a limited company is one of the biggest decisions you'll make when starting or growing your business in the UK. The right structure affects how much tax you pay, what paperwork you handle, and how much you take home at the end of each year.
This calculator compares both structures side-by-side using your actual income figures for the 2026/27 tax year. It shows you exactly how much tax you'll pay as a sole trader versus a limited company director, factoring in income tax, National Insurance, corporation tax, dividend tax, and all the admin costs involved in running each structure.
Most people think limited companies are only for "big businesses," but the truth is more nuanced. If you're earning over £30,000 profit annually, a limited company might save you thousands in tax each year. However, if you're just starting out or earning below that threshold, the extra accountancy fees and admin burden could wipe out any tax benefit.
Whether you're a freelance graphic designer wondering if incorporation makes sense, a consultant who's outgrown sole trader status, or a contractor navigating IR35 rules, this calculator gives you the numbers you need to make an informed choice. It's based on official HMRC rates for 2026/27 and includes realistic costs for accountancy, Companies House fees, and professional indemnity insurance.
Key Differences at a Glance: 2026/27 Tax Year
- Sole Trader Tax Rates: 20% basic, 40% higher, 45% additional rate on profits above £12,570
- Limited Company Tax: 19% corporation tax, then 8.75% dividend tax (basic), 33.75% (higher)
- National Insurance (Sole Trader): Class 2 (£3.45/week) + Class 4 (8% then 2% on profits)
- National Insurance (Limited): Employer 13.8% + Employee 8%/2% on salary only
- Admin Costs: Sole trader £0-£300, Limited company £800-£2,000 annually
- Typical Break-Even Point: £30,000-£50,000 profit (where limited company starts saving money)
Compare Your Tax Bill: Enter Your Numbers
How This Comparison Works
Step 1: Calculate Your Profit
Your taxable profit is simply your annual turnover minus allowable business expenses. This is the amount both sole traders and limited companies get taxed on (though in different ways). Business expenses include equipment, software subscriptions, professional insurance, marketing costs, office rent, travel, and training courses directly related to your work.
Whether you choose sole trader or limited company status, maximising legitimate expense claims reduces your tax bill. Keep detailed records and receipts for everything you claim. If you're unsure what qualifies as a business expense, check HMRC's guidance or use our Self-Employed Tax Calculator for expense breakdowns.
Step 2: Calculate Sole Trader Tax
As a sole trader, you pay income tax and National Insurance directly on your profit. The calculator applies your personal allowance (£12,570 in 2026/27), then charges income tax at 20% (basic rate), 40% (higher rate), or 45% (additional rate) depending on your profit bracket.
You also pay Class 2 NI (£3.45/week if profit exceeds £12,570) and Class 4 NI (8% on profits between £12,570-£50,270, then 2% above that). These rates are set by HMRC for 2026/27. If you have a student loan, repayments are calculated at 9% of income above the relevant threshold for your plan type.
The advantage? Minimal admin costs—many sole traders file their own Self Assessment tax returns for free using HMRC's online tools. You can also offset losses against other income or carry them forward, giving you flexibility in your first year of trading.
Step 3: Calculate Limited Company Tax
Limited companies use a two-stage tax process. First, the company pays 19% corporation tax on profits (after deducting your salary and expenses). Then, when you extract the remaining profit as dividends, you pay dividend tax: 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate), with a £500 tax-free dividend allowance in 2026/27.
Most directors pay themselves a small salary (typically £9,100 to avoid employer NI, or £12,570 to use the full personal allowance) and take the rest as dividends. This structure usually results in lower overall tax than sole trader status, especially for higher earners, because the combined corporation tax + dividend tax rate is lower than income tax + Class 4 NI at higher brackets.
The calculator also factors in employer NI (13.8% on salary above £9,100) and employee NI (8% then 2%). If you're caught by IR35 rules (common for contractors), you're taxed more like an employee, which reduces the limited company advantage. Learn more about contractor taxation with our Contractor Take Home Pay Calculator.
Step 4: Factor in Admin Costs
This is where many calculators fall short. Limited companies have real ongoing costs: accountancy fees (£800-£2,000/year for annual accounts, CT600 returns, and payroll), Companies House confirmation statement (£13-£71/year), business bank accounts (often £5-£10/month), professional indemnity insurance, and accounting software subscriptions.
Sole traders have minimal admin costs—many pay nothing if they file their own tax return. Some use an accountant for £200-£500/year, but it's optional. Our calculator includes realistic cost estimates so you see your actual take-home pay after all expenses, not just theoretical tax savings.
Step 5: Get Personalised Recommendations
After comparing both structures, the calculator provides tailored advice based on your specific numbers. If you're earning under £30,000 profit, you'll likely see a recommendation to stay as a sole trader because admin costs outweigh tax savings. Between £30,000-£50,000, it's often marginal—your decision may depend on factors like limited liability protection or business credibility.
Above £50,000 profit, limited companies typically win on pure tax efficiency, often saving £3,000-£8,000+ annually. But the calculator also considers IR35 status, student loans, VAT registration, and whether you can claim Employment Allowance, giving you a complete picture. Compare these structures alongside your employment rights with our Employment Rights Tools.
All calculations use official HMRC rates for the 2026/27 tax year. Tax rules change annually, so always verify your specific circumstances with an accountant before making structural changes to your business.
Real-World Example: Freelance Consultant Earning £60,000 Profit
The Scenario
Sarah is a marketing consultant with £75,000 turnover and £15,000 expenses, giving her £60,000 profit. She's deciding whether to stay as a sole trader or incorporate. She has a Plan 2 student loan and isn't caught by IR35. She'd pay an accountant £1,200/year for a limited company or £250/year as a sole trader.
Side-by-Side Comparison
Sole Trader
Limited Company
The Verdict
Annual Saving with Limited Company: £1,397
Sarah takes home £1,397 more per year as a limited company director, even after accounting for higher admin costs. Over 5 years, that's nearly £7,000 in savings. The break-even point where limited company becomes worthwhile is typically around £35,000-£40,000 profit for most people.
However, Sarah must also consider the extra admin burden (filing accounts, managing payroll, Companies House compliance) and whether limited liability protection is important for her business. Many consultants in her position incorporate not just for tax savings but also for professional credibility when pitching to corporate clients.
Frequently Asked Questions
Is it better to be a sole trader or limited company in the UK?
There's no universal answer—it depends entirely on your profit level, business goals, and personal circumstances. Here's the practical breakdown:
Choose sole trader if:
- Your profit is under £30,000 (admin costs outweigh tax savings for most people)
- You're just starting out and testing your business idea
- You want minimal paperwork and can file your own tax return
- You have business losses you want to offset against other income (like employment)
- You value simplicity over tax optimisation
Choose limited company if:
- Your profit consistently exceeds £40,000-£50,000 (tax savings justify the admin)
- You want limited liability protection (your personal assets are separate from business debts)
- You work with large corporate clients who prefer contracting with limited companies
- You plan to sell your business eventually (companies are easier to sell than sole trader operations)
- You want to retain profits in the business for future investment
The £30,000-£50,000 profit range is the "grey zone" where personal preference, risk tolerance, and administrative capacity matter as much as pure tax numbers. Use this calculator to see where you sit, then consider non-tax factors before deciding. If you're navigating employment structures, our Notice Period Calculator can help you understand your obligations.
How much tax do I save as a limited company vs sole trader?
Tax savings scale with profit. Here are realistic savings at different income levels for 2026/27:
- £20,000 profit: Limited company typically costs more due to accountancy fees (£800-£1,200) outweighing small tax savings (£200-£400). Net result: £400-£800 worse off as limited company.
- £35,000 profit: Roughly break-even. Tax savings (£1,000-£1,500) approximately match extra admin costs. Choice depends on non-tax factors.
- £50,000 profit: Limited company saves £2,500-£4,000 annually after all costs. This is where incorporation starts making clear financial sense.
- £80,000 profit: Limited company saves £6,000-£9,000 annually. At this level, staying as sole trader is rarely optimal from a pure tax perspective.
- £100,000+ profit: Savings exceed £10,000/year. The higher your profit, the more limited company structure benefits you due to the difference between higher-rate income tax (40%) and corporation tax (19%) + dividend tax.
These figures assume optimal salary/dividend extraction strategies (typically £9,100-£12,570 salary, remainder as dividends), no IR35 complications, and standard accountancy fees. Your actual savings vary based on student loans, pension contributions, and whether you can claim Employment Allowance. Calculate your specific savings above, or explore how your take-home compares with our Take Home Tax Calculator.
What are the disadvantages of being a limited company?
Limited companies come with real trade-offs that go beyond just tax efficiency:
Financial disadvantages:
- Higher running costs: You'll pay £800-£2,000/year for an accountant (annual accounts, CT600 returns, payroll). Sole traders often pay £0-£300.
- Mandatory professional fees: Unlike sole traders who can go DIY, limited company accounts must meet specific filing standards. Most directors need professional help.
- Business bank account costs: Many banks charge £5-£15/month for business accounts. Sole traders can use personal accounts initially.
Administrative disadvantages:
- Complex paperwork: Annual accounts, corporation tax returns (CT600), confirmation statements, dividend paperwork, payroll submissions (even if you're the only employee).
- Strict deadlines: Miss a Companies House deadline and face automatic £150+ fines. Sole traders have more lenient treatment for first-time errors.
- Public disclosure: Your company accounts are publicly visible on Companies House. Anyone can see your turnover, profit, and director details. Sole trader finances are private.
- Less flexibility with money: You can't just withdraw cash whenever you want. Money must be extracted via salary, dividends, or loans (which have tax implications). Sole traders have complete flexibility.
Operational disadvantages:
- Harder to close: Closing a limited company requires formal strike-off or liquidation (£100-£1,000+ costs). Sole traders simply stop trading and file a final tax return.
- IR35 complications: If you're a contractor, you may be caught by IR35 rules which negate most tax benefits of incorporation.
- Director responsibilities: You have legal duties as a company director. Breach them and you can be personally liable, disqualified, or even prosecuted in serious cases.
For many people earning under £30,000-£40,000 profit, these disadvantages outweigh the tax benefits. The admin burden is real—you'll spend 5-10 hours per year on company paperwork versus 2-3 hours for sole trader Self Assessment. Factor this into your decision, especially if you value your time highly or dislike admin work.
Can I change from sole trader to limited company later?
Yes, switching from sole trader to limited company is a common path for growing businesses, and it's more straightforward than most people think. Here's the process:
Step 1: Register the company (1-2 days)
Use Companies House online service (£12-£50 depending on speed) to register your limited company. You'll need a company name (check it's available first), registered office address, director details, and share structure. Most small businesses issue 100 shares at £1 each (£100 total). You can do this yourself or pay an accountant/formation agent £50-£150.
Step 2: Tell HMRC you're ceasing self-employment (immediate)
Log into your Self Assessment account and notify HMRC you're stopping sole trader activities. You'll file a final tax return covering the period up to cessation. You don't "transfer" your business—the company is legally a new entity, so you're starting fresh.
Step 3: Transfer contracts and assets (1-4 weeks)
Contact clients and inform them your services are now provided by [Your Company Name] Ltd. Most clients simply need updated invoices with your company details. For physical assets (equipment, vehicles), you can sell them to your company at market value or current book value. Keep documentation of all transfers.
Step 4: Set up company infrastructure (1 week)
Open a business bank account (this takes longest—banks are slow), register for Corporation Tax with HMRC (online, takes 5 minutes), set up payroll (even if it's just you), and arrange accounting software or hire an accountant. Budget £200-£500 for setup costs beyond the Companies House fee.
Timing considerations:
- Many people incorporate at the start of a new tax year (6 April) for clean record-keeping, but you can switch mid-year if needed.
- If you have ongoing contracts, check terms—some contracts require client approval before "assigning" them to a company.
- You can continue trading as a sole trader while setting up the company (2-4 weeks overlap is normal).
Most freelancers start as sole traders (easy setup, low risk while testing the business), then incorporate once profit exceeds £30,000-£50,000 and they're confident the business is sustainable. There's no penalty for switching, and you can do it entirely yourself if you're comfortable with paperwork, though most people use an accountant for peace of mind. If you're weighing up different job structures, compare your options with our Job Offer Comparison Tool.
Do I need an accountant if I set up a limited company?
Legally, no—directors can file their own accounts and tax returns. Practically, yes—95% of limited company directors use accountants, and here's why:
What you must file annually:
- Annual accounts: Balance sheet, profit & loss statement, notes to the accounts, director's report (for larger companies). Must follow UK GAAP or FRS 102 accounting standards. Format errors lead to rejection and fines.
- Corporation Tax return (CT600): Separate from accounts, with detailed tax computations, capital allowances, and adjustments. More complex than Self Assessment.
- Confirmation statement: Annual Companies House filing (simpler, but still mandatory).
- Payroll submissions (RTI): Even if you're the only employee, you must run payroll and submit monthly or quarterly reports to HMRC.
- Dividend paperwork: Dividend vouchers, board minutes approving dividends (these are simple but essential for HMRC compliance).
Why most directors hire accountants:
- Tax efficiency: Good accountants save more in tax optimisation than they cost in fees. They advise on optimal salary/dividend splits, expense claims, pension contributions, and capital allowances.
- Penalty avoidance: File accounts late and you face automatic £150 fines (£375+ for persistent lateness). File CT600 late and add £100-£1,500 penalties. Accountants manage deadlines.
- Time saving: Doing your own accounts takes 20-40 hours/year if you're not experienced. Most directors prefer to spend that time earning money or growing the business.
- Peace of mind: Accountants have professional indemnity insurance. If they make an error, they're liable. If you make an error, HMRC comes after you.
- HMRC queries: If HMRC investigates or challenges your return, having an accountant handle correspondence saves huge stress and time.
Cost vs benefit:
Accountancy fees for small limited companies range from £800-£2,000/year depending on complexity and location (London costs more). For someone earning £50,000 profit, a good accountant typically saves £1,500-£3,000 in tax optimisation, making them net positive. Below £30,000 profit, the fees may outweigh the benefits—this is one reason why limited companies aren't ideal for lower earners.
Can you DIY?
If you have accounting knowledge, time, and confidence, you can file using HMRC-recognised software (Xero, QuickBooks, FreeAgent). However, most directors who try DIY end up hiring an accountant within 1-2 years because the complexity, stress, and time commitment outweigh the cost savings. Sole traders, by contrast, can easily file their own returns using HMRC's free tools—this flexibility is one of sole trader's biggest advantages. For a broader view of financial planning, check out our Pension Contribution Calculator to understand how pensions fit into your overall tax strategy.
Data Sources & Accuracy
This calculator uses official HMRC rates and thresholds for the 2026/27 tax year:
- Income tax rates and bands: GOV.UK Income Tax rates and Personal Allowances
- National Insurance rates: GOV.UK National Insurance rates and categories
- Corporation Tax: GOV.UK Corporation Tax rates
- Dividend tax rates: GOV.UK Tax on dividends
- Student loan thresholds: GOV.UK Repaying your student loan
- Setting up as a sole trader: GOV.UK Set up as a sole trader
- Setting up a limited company: GOV.UK Register a company
Accountancy fee estimates are based on market research from UK accountancy firms (2025/26 data). All calculations are for illustrative purposes. Tax rules are complex and personal circumstances vary—always consult a qualified accountant before making business structure decisions. HMRC Self Assessment Helpline: 0300 200 3310.
Your Privacy & Data Security
This calculator runs entirely in your browser. No financial data is sent to our servers, stored, or shared with third parties. All calculations are performed locally using JavaScript, ensuring your business finances and personal tax information remain completely private and secure.
For professional tax advice, contact HMRC's Self Assessment helpline (0300 200 3310) or consult a registered accountant. For company formation guidance, visit Companies House (0303 1234 500) or www.gov.uk/companieshouse.