Sole Trader vs Limited Company Calculator 2026/27
Enter your annual income and see a three-way breakdown: sole trader (income tax + Class 4 NI), limited company (corporation tax + salary + dividends), and permanent employee (PAYE). Find the exact income threshold where each structure wins.
How sole trader and limited company taxation works differently
As a sole trader, HMRC treats your business profits as personal income. You pay income tax on everything above the £12,570 personal allowance — 20% basic rate, 40% higher rate above £50,270 — plus Class 4 National Insurance at 9% on profits between £12,570 and £50,270 and 2% above. The combined marginal rate at higher incomes reaches 42%, with no way to defer or restructure it.
A limited company is a separate legal entity. The company pays corporation tax on its profits (19% up to £50,000, 25% above £250,000), and you as director pay yourself a salary plus dividends. Because dividends attract lower tax rates (8.75% basic, 33.75% higher) and no National Insurance, the combined effective rate is substantially lower at most income levels. The saving typically starts to outweigh the administrative costs around £35,000–£40,000 profit per year.
What the comparison does not show
The raw tax numbers favour Ltd Co above roughly £35,000, but three real-world factors close the gap. First, running a limited company costs money — accountancy fees of £1,000–£3,000 per year are typical for a small Ltd Co, versus £300–£600 for a sole trader return. Second, a limited company requires more administration: annual accounts, confirmation statement, corporation tax return, payroll, and dividend minutes. Third, extracting money from the company is less flexible — you cannot simply draw cash; each withdrawal needs to be properly categorised as salary, dividend, or director's loan.
For most self-employed people earning under £30,000, staying as a sole trader is simpler and the tax saving does not justify the overhead. Above £50,000, the Ltd Co advantage is compelling. Between £30,000 and £50,000, it depends on your specific circumstances, tolerance for admin, and whether you already have an accountant.
Your annual income / profit
Tax year 2026/27 · Ltd Co assumes director salary £12,570, all remaining profit taken as dividends, Employment Allowance applied · No other income assumed
Estimates only. Does not constitute tax advice. Sole trader figures exclude business expenses. Ltd Co excludes accountancy costs. Consult a qualified adviser before changing your trading structure.
How this calculator works
- Sole trader
- Income tax applied on profits above £12,570 personal allowance (20% basic, 40% higher, 45% additional). Class 4 NI at 9% on profits £12,570–£50,270, 2% above. No Class 2 NI from April 2024.
- Limited company
- Director salary fixed at £12,570 (full personal allowance, zero income tax, zero employee NI). Employer NI at 15% on salary above £9,100 secondary threshold, offset by Employment Allowance (£10,500). Corporation tax at 19%/25%. All remaining profit taken as dividends — dividend tax applied on dividends above £500 allowance.
- Permanent employee
- Same gross figure treated as employment income. Income tax on earnings above £12,570. Employee NI at 8% on £12,570–£50,270 and 2% above.
- What is not included
- Ltd Co accountancy fees (typically £1,000–£3,000/year), sole trader expense deductions, pension contributions, and student loan repayments. These can materially change the comparison at lower incomes.
Frequently asked questions
At what income does a limited company become more tax-efficient than sole trader?›
The crossover point typically sits around £30,000–£40,000 profit, depending on accountancy costs and individual circumstances. Below this level, the administrative overhead of a limited company can outweigh the tax saving. Above £50,000, the Ltd Co advantage grows significantly due to higher income tax rates on sole trader profits versus the 19% corporation tax rate.
Is a limited company always better than sole trader?›
Not always. A limited company involves more administration, filing obligations (annual accounts, confirmation statement, CT600), accountancy costs, and less flexibility in withdrawing money. For many sole traders earning under £35,000, the tax saving may not justify the extra complexity and cost.
How does dividend tax work for Ltd Co directors?›
Dividends are paid from profits after corporation tax. You can take £500/year tax-free (dividend allowance). Above that, dividends are taxed at 8.75% (basic rate band), 33.75% (higher rate), or 39.35% (additional rate). Crucially, dividends do not attract National Insurance, making them more tax-efficient than equivalent salary for higher earners.
Can I have both a salary and dividends as a Ltd Co director?›
Yes — this is the standard approach. The optimal strategy is to pay yourself a salary up to the personal allowance (£12,570) to minimise income tax and NI, then take remaining profits as dividends. The calculator uses this strategy. The Salary & Dividend Split calculator lets you fine-tune the combination.
What about Class 2 NI for sole traders?›
Class 2 NI was abolished from April 2024. Sole traders now only pay Class 4 NI: 9% on profits between £12,570 and £50,270, and 2% above £50,270. State Pension entitlement is now built into Class 4 NI for those with profits above the Small Profits Threshold.
AccLedger works for sole traders and limited companies
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