Limited Company vs Sole Trader Tax Calculator
Trying to decide whether to register as a sole trader or set up a limited company? This calculator compares your take-home pay under both structures using the real 2025/26 UK tax rules — income tax, Class 4 National Insurance, corporation tax (with marginal relief) and dividend tax — then shows the annual saving and which route wins for your profit level.
2025/26 Figures Used by This Calculator
- Personal allowance: £12,570 (tapered above £100,000, gone at £125,140)
- Income tax: 20% to £50,270, 40% to £125,140, 45% above
- Class 4 NI: 6% on £12,570–£50,270, 2% above (Class 2 abolished)
- Corporation tax: 19% to £50,000, 25% above £250,000, marginal relief in between
- Dividends: £500 allowance, then 8.75% / 33.75% / 39.35%
Compare Your Take-Home Pay
Enter your annual business profit before owner pay. The calculator instantly works out both routes for the 2025/26 tax year.
Limited Company vs Sole Trader Calculator 2025/26
Sole Trader
Limited Company
Assumes a single owner-director who draws all available post-tax profit as dividends (less any amount you choose to retain), no other income, no pension contributions and a standard UK tax code. A real decision should account for accountancy costs, IR35, VAT, pension planning and your wider income. Not financial advice.
How This Calculator Works
The calculator takes one headline number — your annual business profit before you pay yourself — and runs it through both legal structures using the same starting figure, so the comparison is fair. Here is the logic, step by step.
The sole trader route
As a sole trader, your business profit is your personal income. The calculator applies the 2025/26 income tax bands: the first £12,570 is covered by the personal allowance (tapered away once total income passes £100,000), then 20% up to £50,270, 40% up to £125,140 and 45% above. On top of that it adds Class 4 National Insurance: 6% on profit between £12,570 and £50,270, and 2% on anything above £50,270. Class 2 NI is no longer charged for 2025/26 — from 6 April 2024 self-employed people with profit above the small profits threshold keep their benefit entitlement without paying the flat weekly amount. Take-home is simply profit minus income tax minus Class 4 NI.
The limited company route
A company is a separate legal person, so the money flows differently. First the company pays you a salary (you can change it; the default of £12,570 is a common choice because it is free of personal income tax and builds a qualifying year for the State Pension). The salary is a deductible business expense, but in 2025/26 it can create a small employer's National Insurance charge because the secondary threshold fell to just £5,000 — so 15% is due on salary above that, unless the company can claim the £10,500 Employment Allowance. The calculator lets you switch the allowance on or off, since a sole director with no other employees usually cannot claim it.
What is left after salary and employer NI is the company's taxable profit, which is charged to corporation tax: 19% if profit is £50,000 or less, 25% if it is above £250,000, and an effective rate in between thanks to marginal relief (more on that below). The remaining post-tax profit is then distributed to you as dividends. Dividends have their own £500 tax-free allowance and are taxed at 8.75% (basic band), 33.75% (higher band) or 39.35% (additional band), stacked on top of your salary. Crucially, dividends carry no National Insurance. Your total take-home is salary plus net dividends.
Retained profit
If you do not need all the cash, you can leave some profit in the company (it still suffers corporation tax but escapes dividend tax until withdrawn). Enter a figure in the “profit kept in company” box and the calculator reduces the dividend you draw accordingly — useful for modelling tax-year smoothing or saving for a big purchase through the company.
Worked Example: £60,000 Profit
Take a freelancer with £60,000 of annual profit, a single-director company that cannot claim the Employment Allowance, a £12,570 salary and nothing retained. Here is how the two routes compare for 2025/26.
| Sole trader | Amount |
|---|---|
| Profit | £60,000 |
| Income tax (20% on £37,700 + 40% on £9,730) | £11,432 |
| Class 4 NI (6% on £37,700 + 2% on £9,730) | £2,456.60 |
| Take-home pay | £46,111.40 |
| Limited company | Amount |
|---|---|
| Salary | £12,570 |
| Employer NI (15% on £7,570) | £1,135.50 |
| Taxable profit (£60,000 − £12,570 − £1,135.50) | £46,294.50 |
| Corporation tax at 19% | £8,795.96 |
| Dividend pool (post-CT) | £37,498.55 |
| Dividend tax (£500 free, £37,200 at 8.75% then a little at 33.75%) | £3,355 (approx) |
| Take-home pay (salary + net dividends) | £46,713 (approx) |
In this example the limited company route leaves the owner around £600 better off per year — before accounting for the extra accountancy and filing costs of running a company, which often run to £800–£1,500. That is exactly why the “break-even” for incorporation usually sits higher than people expect: the headline tax saving is real but modest at this profit level, and only widens as profit grows or if the company can claim the Employment Allowance. Enter your own figures above to see the precise result — the live calculator carries the pennies that this rounded illustration does not.
The Rules That Actually Move the Answer
Corporation tax marginal relief
Between £50,000 and £250,000 of company profit, HMRC charges the full 25% and then gives back marginal relief. The formula is the standard fraction of 3/200 multiplied by (£250,000 − taxable profit). For example, on £100,000 of profit the relief is 3/200 × £150,000 = £2,250, dropping a £25,000 charge to £22,750 — an effective rate of 22.75%. The thresholds are divided by the number of associated companies, so groups need care. See GOV.UK — Marginal Relief for Corporation Tax.
The 2025/26 employer NI change
This is the single biggest shift this year for owner-managers. From 6 April 2025 the employer's NI rate rose to 15% and the secondary threshold dropped from £9,100 to £5,000. A £12,570 director salary now creates roughly £1,135 of employer NI unless the £10,500 Employment Allowance applies. For some sole directors, a lower salary (around £5,000–£6,500) can now be marginally more efficient — try both salary figures in the calculator. See GOV.UK — NI rates and allowances.
Dividends stack on top of salary
Dividends are taxed as the “top slice” of income. Your salary fills the basic-rate band first, then dividends are taxed at whatever rates remain. With a £12,570 salary, around £37,700 of dividends can fall in the 8.75% band before the 33.75% higher rate kicks in. Full detail is on GOV.UK — Tax on Dividends. Our dividend tax calculator models this slice on its own.
Class 4 NI versus dividend tax
The reason a company can win is structural. A sole trader pays 20% income tax plus 6% Class 4 NI = an effective 26% on basic-band profit. A company pays 19% corporation tax, and the dividend is then taxed at 8.75% on what is left — a combined effective rate of about 26.1% in the basic band. The two are extremely close at the basic level, which is why the saving is small until higher-rate territory, where 40%+6% income tax/NI for a sole trader compares with 25%/19% CT plus 33.75% dividend tax for a company.
Things the tax sum does not capture
Beyond pure tax, weigh limited liability (a company ring-fences personal assets), credibility with larger clients, the ability to retain profit for later, and pension flexibility (employer pension contributions are very tax-efficient through a company). Against that: higher accountancy fees, Companies House filing, public accounts and the IR35 off-payroll rules if you work like an employee. The Federation of Small Businesses and your accountant can help weigh the non-tax side.
When Does Each Structure Usually Win?
| Annual profit | Typically better | Why |
|---|---|---|
| Under £30,000 | Sole trader | Tax saving is tiny and company running costs outweigh it |
| £30,000–£50,000 | Close / depends | Saving emerges; Employment Allowance and salary choice tip the balance |
| £50,000–£100,000 | Often limited company | Higher-rate income tax + NI bites the sole trader harder than CT + dividend tax |
| Over £100,000 | Usually limited company | Ability to retain profit and control timing of dividends adds real value |
These are guidelines, not rules — the calculator above gives the exact figure for your situation. Pair it with the corporation tax loss relief calculator if your company has fluctuating profits, and the Self Assessment calculator to estimate the personal return you will still file under either structure.
Frequently Asked Questions
1. At what profit is a limited company better than a sole trader in 2025/26?
For most people a limited company starts to beat sole trader take-home once annual profit rises above roughly £30,000 to £40,000, because the corporation tax (19%) plus dividend tax (8.75% in the basic band) combination is lighter than 20% income tax plus 6% Class 4 National Insurance. The exact crossover depends on whether your company can claim the Employment Allowance, what salary you take and whether you can leave profit in the company. Use the calculator above to test your own figure rather than relying on a rule of thumb.
2. How is a sole trader taxed in 2025/26?
A sole trader pays income tax on profit above the £12,570 personal allowance: 20% up to £50,270, 40% up to £125,140 and 45% above. On top of that, Class 4 National Insurance is 6% on profit between £12,570 and £50,270 and 2% above £50,270. Class 2 NI was effectively abolished from 6 April 2024 — the self-employed still build up benefit entitlement but no longer pay the flat weekly Class 2 charge if profit is above the small profits threshold.
3. How is a limited company director taxed in 2025/26?
The company pays corporation tax on its profit: 19% up to £50,000, 25% above £250,000, with marginal relief in between giving an effective rate between 19% and 25%. The director usually takes a small salary (often £12,570, which is tax-free for income tax) and then dividends from post-tax profit. Dividends have a £500 tax-free allowance, then 8.75% in the basic band, 33.75% in the higher band and 39.35% in the additional band. Dividends carry no National Insurance.
4. Does a director salary of £12,570 trigger employer's National Insurance?
Yes, partly. For 2025/26 the employer (secondary) NI threshold fell to £5,000, so a £12,570 salary creates employer's NI of 15% on the £7,570 above the threshold — about £1,135.50. However, if the company is eligible for the £10,500 Employment Allowance it can wipe that out. A single-director company with no other employees cannot usually claim the Employment Allowance, so the calculator lets you switch it on or off.
5. What is corporation tax marginal relief and how does it work?
Marginal relief smooths the jump between the 19% small profits rate and the 25% main rate for company profits between £50,000 and £250,000. HMRC charges 25% on the full profit, then reduces the bill by the standard marginal relief fraction of 3/200 multiplied by (£250,000 minus profit). This gives a gradually rising effective rate — for example, profit of £100,000 has an effective corporation tax rate of about 22.75%.
6. Are there non-tax reasons to choose one structure over the other?
Yes. A limited company gives limited liability, can look more credible to larger clients and lets you retain profit for tax planning, but it costs more in accountancy, has Companies House filing duties and puts your accounts on public record. A sole trader is simpler and cheaper to run, with one Self Assessment return, but you are personally liable for business debts. The calculator only compares the tax outcome — weigh the admin, liability and credibility factors separately.