Ask ten business owners why they went limited and eight will say "to save tax". That was often true. The trouble is that the tax system has moved several times since that advice hardened into folklore, and most of the articles you will find online have not moved with it. We ran the numbers on this year's rates. The result surprised even us.
What we compared
One person, one business, no other income, England and Wales rates for 2026/27. As a sole trader you pay income tax and Class 4 National Insurance on your profit, and the rest is yours. As a limited company director you pay yourself the standard efficient way: a £12,570 salary, corporation tax on what is left, then everything remaining as dividends. In both cases you take all the money out and spend it. We come back to what happens if you do not.
The results
| Profit | Sole trader keeps | Company director keeps | Difference |
|---|---|---|---|
| £25,000 | £21,768 | £20,789 | Sole trader +£979 |
| £35,000 | £29,168 | £28,018 | Sole trader +£1,150 |
| £50,000 | £40,268 | £38,862 | Sole trader +£1,406 |
| £60,000 | £46,111 | £46,091 | Dead heat (£20) |
| £75,000 | £54,811 | £53,404 | Sole trader +£1,408 |
| £100,000 | £69,311 | £65,210 | Sole trader +£4,102 |
| £150,000 | £92,040 | £85,110 | Sole trader +£6,931 |
| £200,000 | £118,540 | £105,765 | Sole trader +£12,775 |
Read that again, because it is the opposite of the received wisdom. If you take all your profit out, the limited company never wins on tax in 2026/27. It draws level at around £60,000 and falls further behind the more you earn. And that is before the company's higher running costs.
The workings at £60,000
Sole trader:
- Income tax: £37,700 × 20% = £7,540, plus (£60,000 − £50,270) × 40% = £3,892. Total £11,432.
- Class 4 NI: £37,700 × 6% = £2,262, plus £9,730 × 2% = £194.60. Total £2,456.60. Class 2 is no longer payable.
- Total tax £13,888.60. Take-home £46,111.
Limited company:
- Salary £12,570. Employer NI: (£12,570 − £5,000) × 15% = £1,135.50.
- Profit left: £60,000 − £12,570 − £1,135.50 = £46,294.50. Corporation tax at 19%: £8,795.96.
- Dividends: £46,294.50 − £8,795.96 = £37,498.54. Dividend tax: (£37,498.54 − £500) × 10.75% = £3,977.34.
- Total tax £13,908.80. Take-home £46,091.
Twenty pounds apart. Now subtract the extra cost of running a company, and the sole trader is ahead.
Why the arithmetic flipped
- Dividend tax went up. The basic rate rose to 10.75% and the higher rate to 35.75% on 6 April 2026. A higher-rate director now pays 25% corporation tax and then 35.75% on what is left, an effective 51.8% on each extra pound. A higher-rate sole trader pays 40% plus 2% NI: 42%.
- The dividend allowance is £500. It was £5,000 as recently as 2017/18.
- Employer NI is 15% from £5,000. Even the "efficient" director salary costs the company £1,135.50 in NI, and a single-director company cannot claim the Employment Allowance to offset it.
- Sole traders got cheaper. Class 2 NI is no longer payable for most, and the Class 4 main rate is down to 6%.
Where a limited company still wins
None of this means companies are a bad idea. It means the reason for having one has changed.
1. You do not need all the money. This is the big one. Profit left inside a company is taxed at 19% to 25% and then simply sits there. Take the same £60,000 business, but suppose you only need £40,000 to live on. As a sole trader you are taxed on the full £60,000 regardless: £13,889. As a company, you take the £12,570 salary and £27,430 of dividends, pay £2,895 in dividend tax on top of the £8,796 corporation tax and £1,136 employer NI, a total of £12,826, and £10,069 stays in the company having suffered only 19% tax, available for a lean year, for investment, or to draw in a year when your income is lower. The more you can retain, the wider the gap in the company's favour.
2. Limited liability. If the business is sued or fails, a company's debts are the company's. A sole trader's are personal. For anyone with real exposure (construction, product sales, advice with consequences) this alone can justify the structure.
3. Clients require it. Many larger businesses and public bodies will only contract with a company, and off-payroll working rules make sole-trader engagements awkward for them.
4. Pension contributions. A company can pay into your pension as an employer contribution, deductible against corporation tax with no NI. It is one of the most efficient routes out of a company and has no sole-trader equivalent.
5. Income splitting. If a spouse or partner is genuinely involved, shares in a company let you use two sets of allowances and basic-rate bands in a way that is much harder as a sole trader.
The costs on the other side of the ledger
A company means statutory accounts, a corporation tax return, a confirmation statement, payroll for your salary, dividend paperwork, and a separate personal tax return on top. Expect accountancy fees to be meaningfully higher than for a sole trader; the difference is typically several hundred to over a thousand pounds a year depending on complexity. Set against a tax saving that, on these figures, may be zero, that cost has to be justified by one of the five reasons above.
One nuance for sole traders: Making Tax Digital for Income Tax is now bringing quarterly digital updates to the self-employed above the income thresholds, so the admin gap between the two structures is narrowing from the other direction too.
The honest summary
In 2026/27, do not incorporate to save tax on money you are going to take out and spend. You will not. Incorporate because you can afford to leave profit in the business, because you need limited liability, because clients demand it, or because you want a company pension. Those are good reasons, and for many owners they are decisive. The tax saving simply is not one of them any more, whatever the internet still says.
If you are weighing this up, we will run your actual figures both ways, including your real drawings and your real costs, and tell you plainly which structure fits. That conversation is free, and it is one of the most valuable hours a growing business can spend with an accountant.
Sources: HMRC guidance on GOV.UK for income tax rates, self-employed National Insurance, tax on dividends and corporation tax. Our modelling assumes a single owner with no other income, all profit extracted, and the standard £12,570 salary route; try your own figures in our take-home calculator. Figures correct for 2026/27 and reviewed September 2026. General guidance, not advice on your circumstances.
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