Sole Trader vs Limited Company: When Should You Go Limited? (2026/27)

The 30-second answer

Choosing between sole trader and limited company usually comes down to one question: which leaves me better off? For the 2026/27 tax year, the honest answer is that a limited company is not automatically more tax-efficient — and there is no single profit figure at which you should switch. On a like-for-like basis, the tax and National Insurance comparison can be much closer than the old “go limited at £X” rule suggests, and a company’s extra running costs can offset a modest saving. So the real decision isn’t a number — it’s a judgement across money, admin, risk and growth, and this guide walks you through it.

Why there isn’t one profit figure where you should go limited

The old rule of thumb — “go limited once you earn £X” — no longer holds. Several tax changes now shape the 2026/27 comparison:

• Sole traders’ National Insurance is lower: the main rate of Class 4 NIC is now 6%.
• Dividend tax rose from 6 April 2026, to 10.75% (basic rate) and 35.75% (higher rate) — see tax on dividends.
• A one-person company pays 15% employer’s National Insurance on the director’s salary above £5,000, and a single-director company can’t claim the Employment Allowance.

Here’s the proof point. At £60,000 profit, under the fixed one-person assumptions below, the estimated difference in tax + National Insurance between the two structures is only about £20 a year. That is not a sign that £60,000 is the moment to incorporate — it’s the opposite. It shows the two lines barely diverge, so tax alone never produces a clean cut-off, and a company’s extra running costs can outweigh a small saving on either side of it.

Assumptions behind the £60,000 example. One individual sole trader vs one company with a single director-shareholder · no other employees · a £12,570 director salary · all remaining profit taken as dividends · no other income, pension, retained profit or other shareholders · England, Wales & Northern Ireland · 2026/27 rates. Change any of these and the answer moves — which is exactly why there’s no universal magic number.

THERE ISN’T A MAGIC NUMBER

MONEY · ADMIN · RISK · GROWTH

Tax is only one part of the decision.

See the tax difference at your profit level

Free Sole Trader vs Limited Company Tax Checker →

Is a limited company more tax efficient in 2026/27?

Not automatically, and for many one-person businesses, not once costs are counted. The mechanics: a sole trader pays Income Tax and Class 4 NIC on their profits. A company pays Corporation Tax on its profits — with the rate depending on its profit level — and the owner may then pay tax personally when money is extracted, so the money is effectively taxed twice, once in the company and once in your hands. After the changes above, those two routes can land much closer together than the old rule of thumb suggests, and the extra accountancy and filing a company needs can offset a small tax saving entirely. Where a company is more tax-efficient, it is usually because the owner doesn’t draw all the profit — more on that under Money below.

Tax isn’t the whole decision — MONEY · ADMIN · RISK · GROWTH

Weigh these four honestly for your own situation and the right answer for you usually becomes clear.

Money. The tax comparison is the start, not the finish. Retained profits left inside a company face only Corporation Tax while they stay there, which can matter for owners who reinvest or smooth income across years. Employer pension contributions, other income, and genuine additional shareholders can all move the maths too. Scotland’s Income Tax bands also differ from the figures here.

Admin. A limited company is more to run: annual accounts and a confirmation statement filed at Companies House, a Corporation Tax return, and payroll if you take a salary. A company’s accounts and certain company and director details are placed on the public register at Companies House; a sole trader isn’t required to file accounts publicly. None of this is a dealbreaker — but it’s real time and cost a sole trader doesn’t carry, and it’s part of the price of any tax saving.

Risk. A company is a separate legal entity, so limited liability can protect your personal assets if the business runs into trouble. For higher-exposure businesses that matters a great deal; for a low-risk solo service business, less so — and lenders often ask company directors for personal guarantees anyway, which can narrow the benefit.

Growth. Planning to raise investment, bring in co-owners or issue shares? A company is built for that and a sole trader isn’t. The credibility of “Ltd”, or a client or framework that requires a company, can matter too. A steady solo business with no plans to scale will feel that pull less.

When a limited company may make more sense

A company may make more sense when you want limited liability to protect personal assets, can retain profit in the business, plan to take on investment or additional shareholders, or where employer pension contributions or the credibility of a company matter for your work. In those cases the decision was never really about a magic tax threshold.

When staying a sole trader may make more sense

For many one-person businesses in 2026/27, staying a sole trader can be simpler and lower-cost — especially if you draw most of your profit to live on, your risk is low, and you’ve no immediate plans to scale. Starting as a sole trader and incorporating later, once the numbers or plans change, is a normal path — you’re not locking yourself in. If you’re still getting the business off the ground, choosing your structure is one piece of a bigger picture — my book, Set Up for Success, walks the whole journey.

What about Making Tax Digital?

If you stay self-employed, Making Tax Digital (MTD) for Income Tax may change your record-keeping and software. Two things to keep straight: its thresholds are based on your gross self-employment and property income before expenses — not the profit figures used above, so don’t mistake one for the other; and it’s phased in by income level over the coming years. We explain who’s in and from when in our MTD guide and free MTD checker, and you can read HMRC’s own overview of Making Tax Digital for Income Tax. (If you’re a contractor working through your own limited company, the IR35 / off-payroll working rules can also affect how that income is taxed — worth specific advice.)

Frequently asked questions

Is a limited company always better than a sole trader?
No. For 2026/27, a limited company isn’t automatically more tax-efficient — the comparison can be much closer than the old “go limited at £X” rule suggests. A company may suit you better where you retain profit, need liability protection, or have growth plans — but not automatically on tax.

When should I go limited?
When the non-tax reasons stack up — you want limited liability, you’re reinvesting profit, you’re raising investment or adding shareholders, or credibility matters — rather than at a fixed profit figure. Check your own numbers first with the tax checker.

How much profit do I need before going limited?
There isn’t a reliable single figure for 2026/27 — that’s the whole point of this guide. The tax comparison can be much closer than that rule suggests, so let the four factors decide.

Is it cheaper to run a sole trader business?
Usually on running costs, yes — no company filing, payroll or extra accountancy. Whether that’s offset depends on your circumstances.

Can I switch from sole trader to limited company later?
Yes — many people start as a sole trader and incorporate when the business grows. It’s a defined process; worth planning the timing rather than rushing it.

Are my details public if I run a limited company?
A limited company files annual accounts at Companies House and certain company and director details are placed on the public register. A sole trader isn’t required to file accounts publicly.

Sources (GOV.UK): Income Tax rates · Self-employed National Insurance · Corporation Tax rates · Tax on dividends · Set up a limited company · Making Tax Digital for Income Tax.

Last reviewed 20 August 2026. This guide is general information based on 2026/27 rates for England, Wales & Northern Ireland; it is not personal advice, and your own circumstances may change the result. For advice on your situation, book a call.