Sole Trader or Limited Company?
For years the standard advice was that once you're earning a decent amount, incorporating saves you tax. Take a small salary, pay yourself the rest in dividends, come out ahead. It was true, it was widely repeated, and a lot of it is still sitting on accountancy blogs.
It stopped being reliably true in April 2026. Dividend tax went up two percentage points — the ordinary rate from 8.75% to 10.75%, the upper rate from 33.75% to 35.75% — and that was enough to close a gap that was already narrow.
All figures use 2026–27 rates from GOV.UK, checked in July 2026. Rates for England, Wales and Northern Ireland; Scottish income tax bands differ.
The numbers, run properly
I modelled both structures on identical profit, taking the limited company route as a £12,570 salary — the level most accountants suggest, since it's the Personal Allowance — with everything else drawn as dividends after Corporation Tax. Take-home is after all income tax, National Insurance, Corporation Tax and dividend tax.
| Annual profit | Sole trader | Limited company | Difference |
|---|---|---|---|
| £30,000 | £25,468 | £25,224 | −£244 |
| £50,000 | £40,268 | £39,683 | −£585 |
| £70,000 | £51,911 | £51,579 | −£332 |
| £100,000 | £69,311 | £65,746 | −£3,566 |
The limited company loses at every level. Modestly in the middle, and then badly at £100,000 — that one is the Personal Allowance taper, which withdraws £1 of allowance for every £2 of income over £100,000 and creates a punishing effective rate on that band regardless of structure.
Out of curiosity I re-ran the same model with the old 8.75% and 33.75% dividend rates. Under those, the limited company came out ahead at £30,000, £50,000 and £70,000. So the two-point rise genuinely is what flipped it, and any comparison you read that was written before late 2025 is now pointing the wrong way.
Sources: HM Treasury — dividend rate changes · Self-employed NI rates · Corporation Tax rates
What you're each actually paying
Sole trader
Income tax at 20/40/45% on profits above the £12,570 Personal Allowance, plus Class 4 National Insurance at 6% between £12,570 and £50,270 and 2% above that. Class 2 is treated as paid once profits reach £7,105, so it no longer costs you anything.
Limited company
Corporation Tax first — 19% on profits up to £50,000, 25% above £250,000, with Marginal Relief in between. Then dividend tax on what you take out: 10.75% basic, 35.75% higher, 39.35% additional, after a £500 dividend allowance. Two layers of tax on the same money.
That double layer is the whole story. It used to be more than offset by avoiding National Insurance on dividends. At 10.75% against Class 4's 6%, it mostly isn't any more.
Why you might still incorporate
Tax is one input and for a startup it's usually not the deciding one. Several of these matter more than a few hundred pounds:
- You cannot raise equity as a sole trader. There are no shares to sell. If you intend to take investment at any point, this argument ends the discussion on its own.
- SEIS and EIS require a company. Those schemes are the main reason UK angel investors write cheques into early-stage businesses, and they're unavailable to sole traders entirely. See the funding guide for what they involve.
- Limited liability is real. As a sole trader you and the business are legally the same person, so business debts are your debts. Once you have customer contracts with liability clauses, that stops being theoretical.
- Some customers won't buy from a sole trader. Enterprise procurement occasionally rules it out at the vendor onboarding stage, and you rarely get told that's why.
- You can leave profit in the company. The comparison above assumes you extract everything. If you're reinvesting, you only pay Corporation Tax and the dividend tax never arises — which changes the answer materially.
Running against that: a limited company means annual accounts, a Corporation Tax return, a confirmation statement, and your name and registered address on a public register. Realistically that's a few hundred pounds a year of accountancy you wouldn't otherwise spend, which the cost of running a company guide goes through.
A reasonable way to decide
If you're building something you intend to raise money for, incorporate now and stop thinking about it. The tax difference is small, the structural requirement is absolute, and doing it later means transferring assets and explaining the history to investors.
If you're consulting, freelancing, or running something you plan to own outright indefinitely, the tax case for incorporating has largely evaporated. Sole trader is simpler, cheaper to run, and on these numbers leaves you slightly better off. Incorporate for liability protection or client requirements if you need to — just don't do it expecting a tax saving that isn't there any more.
Either way, the number that goes into your runway calculation is post-tax. Founders routinely model on profit and then find the tax bill has quietly taken a quarter of it.
Usual caveat: I'm a developer, not an accountant. This model makes assumptions — a specific salary level, full profit extraction, no pension contributions, no other income, English rates — and changing any of them moves the answer. It's a starting point for a conversation with someone qualified, not a substitute for one.