Should you incorporate? In 2026/27, not for tax alone if you draw all your profit. At both £50,000 and £100,000 of profit, a sole trader keeps more than a one-director company paying the same profit out as salary and dividends. Incorporating still pays when you can leave profit in the business, want to fund a pension through the company, or need limited liability.
How is a sole trader taxed in 2026/27?
A sole trader pays Income Tax and Class 4 National Insurance on the business's profit, whether or not they draw it. In England, Wales and Northern Ireland the first £12,570 is covered by the Personal Allowance, profit up to £50,270 is taxed at 20%, profit above that at 40%, and profit over £125,140 at 45%. The Personal Allowance is withdrawn by £1 for every £2 of income over £100,000.
Class 4 National Insurance is 6% on profits between £12,570 and £50,270 and 2% above that. Class 2 is no longer payable: if your profits are £7,105 or more it is treated as paid, which protects your State Pension record at no cost.
Since 6 April 2026, sole traders and landlords with qualifying income over £50,000 have also had to keep digital records and send quarterly updates under Making Tax Digital for Income Tax. The threshold falls to £30,000 in April 2027 and £20,000 in April 2028.
How is a limited company taxed in 2026/27?
A company pays corporation tax on its profits: 19% on profits of £50,000 or less, 25% on profits over £250,000, and a rate tapered by marginal relief in between. You then pay personal tax on whatever you take out, usually as a mix of salary and dividends.
- Salary is deductible for corporation tax. The employee pays National Insurance of 8% on pay between £12,570 and £50,270 and 2% above that, and the company pays 15% employer National Insurance on pay above £5,000.
- Dividends are paid from profit after corporation tax. The first £500 is tax-free, then dividends are taxed at 10.75% in the basic-rate band, 35.75% in the higher-rate band and 39.35% above £125,140. There is no National Insurance on dividends.
- The Employment Allowance takes up to £10,500 a year off employer National Insurance, but a company whose only employee liable for employer National Insurance is a sole director cannot claim it.
Sole trader or limited company: the numbers at £50,000 of profit
Take a business making £50,000 of profit in 2026/27, owned by one person with no other income. As a company, it pays its director a £12,570 salary, which works out cheaper here than a £5,000 salary, and pays out the rest of its profit as dividends.
As a sole trader
- Income Tax: £7,486.00
- Class 4 National Insurance: £2,245.80
- Total: £9,731.80 in tax, leaving £40,268.20
As a limited company
- Employer National Insurance on the salary: £1,135.50, with no Employment Allowance for a sole director
- Corporation tax at 19% on the remaining £36,294.50 of profit: £6,895.96
- Dividend tax on the £29,398.55 paid out: £3,106.59
- Total: £11,138.05 in tax, leaving £38,861.95
At this level the sole trader keeps £1,406.25 more, before counting the company's extra running costs: statutory accounts, a corporation tax return, payroll and an annual confirmation statement all add to the accountancy bill.
What changes at £100,000 of profit?
Taking every pound out still favours the sole trader. At £100,000 of profit a sole trader pays £30,688.60 in Income Tax and National Insurance. A one-director company paying a £12,570 salary and distributing everything else pays £34,790.38: £1,135.50 of employer National Insurance, £19,118.04 of corporation tax after marginal relief, and £14,536.83 of dividend tax.
The picture changes if you don't need all the profit. If the company pays dividends only up to the top of the basic-rate band, £37,700 on top of the salary, the tax paid for the year falls to £24,252.54 and £29,476.46 stays in the company. That money has so far borne only corporation tax. It will be taxed as dividends when you take it out, but you choose when, and in the meantime it can fund equipment, a pension contribution or a quieter year.
Incorporation now saves tax mainly by letting you leave profit in the business. If you need to draw everything you earn, the tax case for a company has largely gone at these profit levels.
When does incorporating make sense?
- You can leave profit in the business. Retained profit bears corporation tax of 19% to 25% rather than 40% or more in your hands, which suits businesses that are investing or evening out their income across years.
- You want to put profit into a pension. Employer pension contributions paid by the company are normally deductible for corporation tax and carry no National Insurance.
- You need limited liability. A company's debts are its own, so your personal assets are protected, although lenders often ask directors for personal guarantees.
- Your clients or plans require it. Some contracts are only offered to limited companies, and a company is the usual vehicle for bringing in investors or eventually selling the business.
When is staying a sole trader better?
- You draw most or all of your profit to live on.
- Your profits are modest or unpredictable, so the fixed costs of running a company swallow any saving.
- You value simplicity: one Self Assessment return, no payroll, and no public record at Companies House.
What changes legally when you incorporate?
A limited company is a separate legal person, and its money is not your money. You take it out as salary, dividends or a properly recorded director's loan, and a loan still outstanding nine months after the company's year end triggers an extra corporation tax charge. As a director you also take on legal duties, including acting in the company's interests and keeping proper records.
Your name and a correspondence address appear on the public register, and new directors must verify their identity with Companies House, a requirement that began on 18 November 2025. Each year the company files statutory accounts, a confirmation statement and a corporation tax return, and runs payroll for any salary it pays.
How do you move from sole trader to limited company?
- Register the company at Companies House, with yourself as director and shareholder, and verify your identity.
- Register the company for corporation tax within three months of it starting to trade, and set up PAYE if it will pay a salary.
- Transfer the business, including its assets, contracts and goodwill, to the company. If you transfer the whole business as a going concern in exchange for shares, incorporation relief can defer any Capital Gains Tax.
- Open a business bank account in the company's name, and update your invoices, contracts and VAT registration.
- Tell HMRC you have stopped trading as a sole trader, and file your final Self Assessment return for the business.
Frequently asked questions
At what profit is it worth going limited?
There is no longer a single break-even figure. If you take all the profit out, a sole trader keeps more at both £50,000 and £100,000 in 2026/27. A company comes out ahead when a meaningful share of the profit can stay in the business.
Can I pay myself only in dividends?
You can, but a £12,570 salary is usually worth paying. It uses your Personal Allowance, is deductible for corporation tax and builds your State Pension record, which needs pay above the £6,708 lower earnings limit for 2026/27.
Will incorporating trigger Capital Gains Tax?
Transferring assets such as goodwill to a company is a disposal for Capital Gains Tax, but incorporation relief defers the gain automatically when the whole business is transferred as a going concern wholly or partly in exchange for shares.
Does Making Tax Digital apply to limited companies?
Making Tax Digital for Income Tax covers sole traders and landlords, not companies. A VAT-registered company must still keep digital records and file its VAT returns through compatible software.
Do these figures apply in Scotland?
Not exactly. Scotland sets its own Income Tax bands for earnings and profits, so a Scottish sole trader's bill is different. Dividend tax, National Insurance and corporation tax are the same across the UK.
These examples assume a 12-month accounting period, one director with no other income, no associated companies and no pension contributions. Real decisions turn on your own numbers, so talk to us about tax planning or book a free discovery call and we'll model both routes for you.