Compare tax, take-home pay, and business structure costs side by side with our interactive calculator
Tax Comparison Calculator 2025/26
Enter your annual profit to see how much tax you'd pay as a sole trader versus a limited company director.
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Your Tax Comparison
Sole Trader Take-Home
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Limited Company Take-Home
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Sole Trader Total Tax & NI
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Ltd Company Total Tax
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Annual Saving (Ltd vs Sole Trader)
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Ltd Effective Tax Rate
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Comparison at Different Profit Levels (2025/26)
Annual Profit
Sole Trader Take-Home
Ltd Company Take-Home
Annual Saving
Recommendation
Sole Trader – How Tax Works
As a sole trader, all business profits are your personal income. You pay tax and National Insurance on your profits above the Personal Allowance of £12,570.
Income Tax Rates 2025/26
£0 – £12,570: 0% (Personal Allowance)
£12,571 – £50,270: 20% (Basic Rate)
£50,271 – £125,140: 40% (Higher Rate)
Above £125,140: 45% (Additional Rate)
National Insurance 2025/26
Class 2 NI: £3.45/week if profits above £12,570 (= £179.40/year)
Class 4 NI: 9% on profits £12,570–£50,270; 2% above £50,270
Example: A sole trader with £50,000 profit pays approximately: Income Tax £7,486 + Class 2 NI £179 + Class 4 NI £3,394 = £11,059 total, leaving £38,941 take-home.
Limited Company – How Tax Works
A limited company pays Corporation Tax on its profits. The director then extracts income via a combination of salary and dividends to maximise take-home pay.
Corporation Tax Rates 2025/26
Profits up to £50,000: 19% (Small Profits Rate)
Profits £50,001–£250,000: Marginal Relief applies
Profits above £250,000: 25% (Main Rate)
Optimal Director Strategy
Most accountants recommend one of two salary strategies:
Option A – Salary at £12,570: No income tax, no NI. Full Personal Allowance used.
Option B – Salary at £9,100 (LEL): No NI cost, but preserves NI credit for State Pension.
Remaining profit after salary and Corporation Tax is distributed as dividends.
Dividend Tax Rates 2025/26
Dividend Allowance: £500 tax-free
Basic Rate band: 8.75%
Higher Rate band: 33.75%
Additional Rate: 39.35%
Example: A director with £50,000 company profit takes salary £12,570 + dividends from remaining profit after 19% Corp Tax. Total tax significantly less than sole trader equivalent.
Pros and Cons Comparison
Sole Trader
Advantages
Simple to set up (free)
Minimal administration
Private – no public accounts
No confirmation statements
Losses offset other income
Disadvantages
Personal liability for debts
Less tax-efficient above ~£25k profit
Harder to raise investment
Less credibility with some clients
Self Assessment required
Limited Company
Advantages
Limited liability protection
More tax-efficient above £25k profit
Professional credibility
Easier to raise investment
Retain profits at lower Corp Tax rate
Disadvantages
Annual accounts (public record)
Confirmation statement required
More complex admin
Accountant costs (£500–£2,500/yr)
IR35 risk for contractors
Setup and Ongoing Costs
Cost
Sole Trader
Limited Company
Registration fee
Free (Self Assessment)
£12 (Companies House online)
Time to set up
Same day
24–48 hours
Annual accounts
Self Assessment only
Statutory accounts required
Confirmation statement
None
£34/year
Accountant fees
£150–£600/year
£500–£2,500/year
Corporation Tax return
Not applicable
Required annually
Payroll (if salary)
Not required
Required (PAYE)
IR35 – Contractors Must Read
IR35 (off-payroll working rules) is critical for contractors operating through a limited company. If HMRC determines that your working relationship resembles employment, all income from that contract is taxed as salary, eliminating the tax benefits of operating as a limited company.
IR35 applies when: You work in the public sector or for a large/medium private sector client. Since 2021, responsibility for determining IR35 status lies with the end client (not the contractor) in these sectors.
Key IR35 factors: control (who decides how work is done), substitution (can you send someone else?), mutuality of obligation (must they offer work, must you accept?).
Sole traders are not subject to IR35. If IR35 is a concern, being a sole trader or umbrella company employee may be simpler.
Making Tax Digital (MTD)
MTD for Income Tax Self Assessment (MTD ITSA) is being introduced in phases:
April 2026: Sole traders and landlords with income above £50,000 must use MTD-compatible software and submit quarterly updates to HMRC.
April 2027: Extended to income above £30,000.
Future: May extend to lower income thresholds.
Limited companies subject to MTD for VAT if VAT-registered (already in force). Corporation Tax MTD is planned for later years.
When to Choose Each Structure
Choose Sole Trader if:
Your profit is below £20,000–£25,000
You value simplicity over tax efficiency
You are starting out and testing your business idea
Your clients don't require a limited company
You want to avoid company administration and costs
Choose Limited Company if:
Your profit consistently exceeds £25,000–£35,000
You want to retain profits in the business at 19% Corp Tax
You need limited liability protection
You are approaching or above the higher-rate income tax threshold
Your clients or contracts require a limited company structure
You plan to grow, take on staff, or seek investment
Frequently Asked Questions
When should I switch from sole trader to limited company?
Most accountants recommend switching when your profit consistently exceeds £25,000–£35,000 per year. Above this level, the corporation tax rate (19%) plus dividend tax is typically lower than income tax and NI as a sole trader. Your personal circumstances matter, so always get tailored advice.
How much does it cost to set up a limited company?
Registering a limited company at Companies House costs just £12 online and takes around 24 hours. Ongoing costs include an accountant (£500–£2,500/year), confirmation statements (£34/year), and Companies House filings. A sole trader registers for Self Assessment for free.
Is a sole trader or limited company better for IR35?
If you work through a limited company but your engagement falls inside IR35 in the public sector or a large private company, all income from that contract is treated as salary, removing the tax advantages. Sole traders are not subject to IR35, making life simpler if IR35 risk is high.
What are the main tax differences?
Sole traders pay income tax (20%/40%/45%) plus Class 2 NI (£3.45/week) and Class 4 NI (9% on £12,570–£50,270, 2% above). Limited companies pay Corporation Tax at 19%–25% on profits, and directors extract income via salary and dividends taxed at lower rates (8.75%/33.75%/39.35%). No NI on dividends.
Do I need an accountant for a limited company?
You are legally required to file statutory accounts, a confirmation statement, and a Corporation Tax return annually. While you can do this yourself, most directors use an accountant (£500–£2,500/year) to ensure compliance and to optimise their salary/dividend split for maximum take-home pay.
Can I convert my sole trader business to a limited company?
Yes. You incorporate a new limited company, transfer your business assets, and notify HMRC. You must de-register your sole trader Self Assessment if you cease that business. Your accountant can advise on any capital gains implications of transferring assets to the company.
What is Making Tax Digital and does it affect me?
Making Tax Digital (MTD) for Income Tax applies from April 2026 to sole traders and landlords with income above £50,000. Limited companies are already subject to MTD for VAT. Both structures must keep digital records and submit quarterly updates via compatible software.
MB
Mustafa Bilgic
UK tax and financial content specialist. Updated for 2025/26 tax year rates and thresholds. Last reviewed: 20 February 2026.