The Fundamental Tax Difference
The core reason a limited company saves tax is that corporation tax (19–25%) is lower than the combined income tax and NI rates on equivalent self-employment income (up to 47%). A sole trader with £80,000 in profits pays approximately £23,500 in income tax and National Insurance. The same profit routed through a limited company — with a £12,570 director salary and the rest as dividends — results in approximately £17,000 in total tax (corporation tax plus dividend tax). That is a £6,500 annual saving before accounting for running costs.
The Break-Even Point
The tax saving only justifies the extra cost and admin if it exceeds the incremental cost of running a limited company. A realistic incremental accountancy cost is £1,200–£2,000 per year above what a sole trader pays. At £30,000 profit the raw tax saving is around £2,000. After accountancy, the net saving is marginal. At £40,000 profit the raw saving is around £3,800 — more meaningful. At £60,000 it grows to around £6,000 after costs.
Approximate break-even: £30,000–£35,000 annual profit, assuming £1,500 incremental accountancy costs.
Year-by-Year Tax Comparison (2026/27)
| Annual profit | Sole trader total tax | Ltd Co total tax | Annual saving | |---|---|---|---| | £20,000 | £1,900 | £2,100 | −£200 (worse) | | £30,000 | £5,500 | £4,200 | +£1,300 | | £40,000 | £9,700 | £6,800 | +£2,900 | | £60,000 | £17,100 | £10,700 | +£6,400 | | £80,000 | £23,500 | £16,900 | +£6,600 | | £100,000 | £31,100 | £23,800 | +£7,300 |
Ltd Co figures use £12,570 director salary, all remaining profit as dividends, Employment Allowance applied, no other income.
The Hidden Costs People Forget
1. Accountancy fees. A Ltd Co requires annual accounts (iXBRL format), a corporation tax return (CT600), payroll processing (even if just the director), and a confirmation statement. A qualified accountant typically charges £1,500–£3,500 for a small Ltd Co versus £300–£800 for a sole trader self-assessment. The difference is real.
2. Slower access to cash. Sole trader profits are immediately yours. Company profits belong to the company. To extract money you must declare a dividend, process payroll, or record a director's loan. This creates admin and, if not done properly, can trigger HMRC investigation or S455 tax on outstanding director's loans.
3. Two years of tax returns initially. When you incorporate mid-year, you have a sole trader return for part of the year and a company return for the remainder. Transition years are the most complex and most expensive to administer.
When Ltd Co Is the Right Call
Beyond the tax saving, incorporate if:
- You are growing and want to retain profits in the business rather than drawing them all
- You want limited liability protection
- You have a business partner and want to formalise equity and profit sharing
- You have employees or plan to hire
- You want to split income with a spouse or partner who is a lower-rate taxpayer (see the multi-shareholder calculator)
Calculate Your Specific Saving
The sole trader vs Ltd Co calculator shows the three-way comparison at any income level with a full breakdown of every deduction. The salary and dividend split calculator then helps you optimise how you extract income from the company once incorporated.
AccLedger supports both structures and makes the transition seamless — your historical bookkeeping data moves with you.