Limited Company vs Sole Trader UK — Which Pays Less Tax?
Sole trader or limited company? It is one of the first decisions for anyone starting a business in the UK, and tax is usually the reason people ask. This limited company vs sole trader UK guide explains how each structure is taxed in 2025/26, with worked examples at £40,000 and £80,000 profit, so you can see when a company actually pays less — and when it does not.
The basic difference
A sole trader pays personal tax on the business profit. There is no separate business — you and the business are the same person for tax.
A limited company is separate from you. The company pays Corporation Tax on its profits first. You then pay personal tax only on the money you take out, as salary or dividends.
That separation is the whole tax story: a company lets you choose when to take money out, and dividends are taxed differently from salary. A sole trader cannot do either of those things.
How a sole trader is taxed in 2025/26
You pay Income Tax and National Insurance on your taxable profit (income minus allowable expenses):
- Income Tax: Personal Allowance £12,570, then 20% up to £50,270 total income, 40% from £50,271 to £125,140, 45% above £125,140.
- Class 4 National Insurance: 6% on profits between £12,570 and £50,270, then 2% above £50,270.
- Class 2 National Insurance: since April 2024 it is no longer compulsory. If your profits are above the small profits threshold (£6,845 in 2025/26) you are treated as having paid it for your State Pension record. Below that, you can pay it voluntarily at £3.50 a week.
You report everything on your Self Assessment return, due 31 January after the tax year ends.
How a limited company is taxed in 2025/26
The company pays Corporation Tax on its taxable profits:
| Company profit | Corporation Tax rate |
|---|---|
| Up to £50,000 | 19% (small profits rate) |
| £50,000 to £250,000 | Marginal relief applies — effective rate rises from 19% towards 25% |
| Over £250,000 | 25% (main rate) |
Profits in the middle band are taxed at 25% and then reduced by marginal relief, so each extra pound in that band is effectively taxed at 26.5%.
Then, when you take money out:
- Salary: taxed like any employee’s pay — Income Tax and employee National Insurance, plus employer National Insurance for the company.
- Dividends: paid from profits after Corporation Tax. The first £500 of dividends is tax-free (dividend allowance, 2025/26). Above that: 8.75% at basic rate, 33.75% at higher rate, 39.35% at additional rate. Dividends do not attract National Insurance.
One warning: dividend rates rise from 6 April 2026. For 2026/27 the basic rate becomes 10.75% and the higher rate 35.75% (additional stays 39.35%). The examples below use 2025/26 rates.
Worked example 1 — £40,000 profit
Assumptions: no other income, no expenses left to claim, figures before any pension contributions. These are illustrative totals, not a quote for your business.
Sole trader
- Income Tax: (£40,000 − £12,570) × 20% = £5,486
- Class 4 NI: (£40,000 − £12,570) × 6% = £1,646
- Total tax and NI: £7,132
Limited company (owner takes a £12,570 salary, the rest as dividends)
- Corporation Tax on £27,430 (£40,000 − salary) at 19% = £5,212
- Dividends available: £22,218. Dividend tax: £500 free, the rest at 8.75% = £1,900
- Total tax: £7,112
At £40,000 there is almost no difference — about £20. The company does not save you tax at this level if you take all the money out.
Worked example 2 — £80,000 profit
Same assumptions as above.
Sole trader
- Income Tax: £7,540 basic + £11,892 higher = £19,432
- Class 4 NI: £2,262 + £595 = £2,857
- Total tax and NI: £22,289
Limited company (owner takes a £12,570 salary, the rest as dividends)
- Corporation Tax on £67,430 at the marginal-relief rate = £14,119
- Dividends available: £53,311. Dividend tax: £3,255 basic + £5,269 higher = £8,524
- Total tax if you take everything out: £22,643
Taking everything out, the company is slightly more expensive at £80,000. But if you leave money in the company, you only pay the £14,119 Corporation Tax now, and the personal tax waits until you take the money out. That timing — not a lower rate — is where a company often wins.
When a limited company usually wins
- You do not need all the profit to live on, so you can leave money in the company.
- Your profits are growing and you want to keep cash in the business.
- You want limited liability — the company’s debts are generally not your personal debts.
- You want to split income, for example paying a spouse a salary or dividends for work they genuinely do (check the rules first).
When a sole trader usually wins
- Your profits are modest (under about £40,000–£50,000) and you take all the money out.
- You want the simplest setup — no Companies House filings, no company accounts, no payroll.
- Your business makes a loss — sole trader losses can be offset against other income in some cases.
- You do not want the admin: a company must file accounts and a confirmation statement every year, even if it makes no profit.
What else to think about
Tax is not the only factor. A company costs more to run (accountant, Companies House, payroll), and you must keep company money separate from personal money. A sole trader is personally liable for business debts. If you work with clients who expect a limited company, that matters too.
You can also switch later — many people start as a sole trader and incorporate when profits grow. Switching has its own tax rules, so get advice before you do it.
What to check now
- Work out your expected profit for the year, after expenses.
- If it is under £50,000 and you take it all out, a sole trader is usually simpler and no more expensive.
- If you can leave money in the business, run the company numbers with an accountant.
- Remember the dividend rate rise from 6 April 2026 when you plan for next year.
Frequently asked questions
Does a limited company always pay less tax than a sole trader?
No — this limited company vs sole trader UK comparison shows that, at £40,000 profit, the difference is almost nothing if you take all the money out, and at £80,000 a company can cost slightly more on the same basis. A company wins mainly when you leave profits in the business.
What is the Corporation Tax rate in 2025/26?
19% on profits up to £50,000, 25% over £250,000, with marginal relief in between.
Do I pay National Insurance on dividends?
No. Dividends do not attract National Insurance, which is one reason the salary-plus-dividends route is popular for company directors.
Can I change from sole trader to limited company later?
Yes. Many businesses start as sole traders and incorporate later, but the switch has tax consequences, so get advice first.
Do I need an accountant for a limited company?
Not by law, but most company directors use one — company accounts, Corporation Tax and payroll are harder to get right than a sole trader’s Self Assessment.
This article gives general information about UK tax, not personal financial or tax advice. Tax rules can change, and your situation may be different. Check GOV.UK or speak to a qualified accountant before you act.
